Dependence on External Finance: An Inherent Industry Characteristic?

Abstract

Abstract:Rajan and Zingales (1998) use U.S. Compustat firm data for the 1980s to obtain measures of manufacturing sectors' Dependence on External Finance (DEF). They take any differences in these measures to be structural/technological and thus applicable to other countries. Their joint assumptions about how to obtain representative values of DEF by sector and about why these values differ fundamentally between sectors have been adopted in additional studies seeking to show that sectors benefit unequally from a country's level of financial development. However, the assumptions as such have not been examined. The present study, conducted with cyclically adjusted annual measures of DEF derived from U.S. industry data for 1977-1997, attempts to do so using data that are aggregated by sector. We find that those variables that may be regarded as structural/ technological have very low explanatory power, and that the DEF figures calculated from micro data do not correspond closely to what is obtained from aggregate figures. Hence key assumptions on which RZ's argumentation is based could not be validated. Keywords:Growth and finance, financial development, industry structure JEL-Classification: E50, G20, G30, O14, O16 Non Technical SummaryIf there were a good fix on the degree to which different industry sectors inherently de- By providing an alternative based on cyclically-adjusted annual data from the U.S. Bureau of Economic Analysis, we question the generality of their measure. We also find that the RZ assumption, that differences in DEF by manufacturing sector are structural/technological, is not well supported by our macroeconomic data that allow testing for the influence of a number of, partly structural/technological, variables. Among these variables are the depreciation rate, the leverage rate, the value-added rate, and, most importantly, the long-term rate of growth of the real net stock of capital, by sector. The contribution of these variables to explaining sectoral DEF is quite limited.Having rejected two of the premises on which the transference of a particular set of U.S.data to a global theory of comparative advantage rests, we conclude: The interpretation of findings on interactions between various indicators of domestic financial development and US-based measures of DEF in equations seeking to explain the structure of the growth of manufacturing all over the world is moot. Nicht technische ZusammenfassungKönnte man den Grad der Abhängigkeit unterschiedlicher Industriesektoren von der

More Mortgages, Lower Growth?

“…In defense of this assumption, Rajan and Zingales (1998) A more problematic assumption may be that the US-based measure of external dependence is a valid proxy for the same industries across countries. Furstenberg and Kalckreuth (2006) show that even in the US, the measure for financing conditions in manufacturing industries changes when using an alternative source of industry data. Furthermore, they find that the presumed correlations between external dependence and a number of structural/technological industry characteristics, are in fact weak.…”