Industry Growth and Capital Allocation: Does Having a Market or Bankbased system Matter

1
Industry Growth and Capital AllocationDoes
Having a Market- or Bank-based system Matter?

• Thorsten Beck and Ross Levine

2
Two Competing Financial systems

• Market-based system
• Representative countriesUSA, UK
• Bank-based system
• Representative countriesGermany, Japan

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Key Issue

• Which type of financial system is more advanced
  in terms of facilitate economic growth?
• Policy Implications for developing country

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Four Competing Views

• Bank-based view
• Market-based view
• Financial Services view
• Law and finance view

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Bank-based view

• Gerschenkron(1962)
• Banks more effectively finance industrial
  expansion in developing countries
• Rajan and Zingales(1999)
• Powerful banks induce firms to reveal information
• Banks without regulatory restrictions achieve
  optimal size
• Stulz(2000)
• Banks effectively provide external resources to
  firms which need stage financing

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Market-based view

• Allocating Capital effectively
• Hellwig(1991), Rajan(1992)
• Powerful banks hinder innovation
• Hellwig(1998), Wenger and Kaserer(1998) Collusion
  problem in bank-based system
• Allen(1993)
• Financial markets promote RD-based firms

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Financial services view

• Levine(1997)
• Focusing on financial systems ability to provide
  specific services
• revealing information, reducing transaction
  cost, etc.

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Law and finance view

• La Porta,Lopez-de-silanes,Shleifer and
  Vishny(2000)
• The role of legal system in determining the
  level of financial development
• The more protection on outside investors, the
  advanced the financial system

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Testify these hypothesis

• Criterions of good financial system
• 1.Providing external finance
• 2.Facilitating the formation of new
  establishment
• 3.Improving the efficiency of capital
  allocation across industries

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Methodology

• Panel MethodologyCross-industry,cross-country
  Regressions
• From Rajan and Zingales(1998)
• Cross-Country MethodologyInvestment Flow
  Efficiency
• From Wurgler(2000)

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Panel Methodology

• Basic Model

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Some variables

• External External Finance Dependence
• Definition the ratio of capital
  expenditures minus cash flow from operations
  divided by capital expenditures
• Data resource Compustat
• FS Financial development
• Indicator Finance-Aggregate
• Definition The first principal component
  of Finance-Activity
• and Finance-Size

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• FSFinancial Structure
• Three Indicators
• 1.Structure-Aggregate
• Definition The first principal component
  of Structure-Activity
• and Structure Size
• 2.Restrict-Aggregate
• Grading the restrictions on banks
• 3.State Ownership
• Definition the percentage of assets of
  the 10 largest banks owned
• by government

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Extension of basic model(1)
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Extension of basic model(2)
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Predictions of different views

• Market-based view
• 1.Structure-Aggregate
• 2. Restrict-Aggregate
• 3. State Ownership

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Predictions of different views

• Bank-based view
• 1.Structure-Aggregate
• 2. Restrict-Aggregate
• 3. State Ownership

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Predictions of different views

• Financial-services view
• Law and Finance view

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Cross-country Methodology

• Basic model

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Conclusion

• The results support the financial services and
  law and finance views.
• No support for either the bank-based or the
  market-based views.