Investment in Relationship-Specific Assets: Does Finance Matter?

Kukenova, Madina and Strieborny, Martin (2009): Investment in Relationship-Specific Assets: Does Finance Matter?

Abstract

We show that contract-intensive industries grow disproportionately faster both in countries with a high initial level of financial development and in the US states which deregulated their banking sector. These industries use a high share of relationship-specific inputs that can be purchased only via specific contracts with the suppliers. Accordingly, both firms in those industries and their suppliers face above-average levels of risk and transaction costs. Our empirical results thus confirm the theoretical claim that finance promotes the real economy via managing risk and decreasing transaction costs. Furthermore, the pro-growth effect of finance seems to come from financial intermediaries like banks rather than from stock markets. This suggests that the intrinsic functions of relationship-banking (long-term commitment, increase in reputation and planning horizon of the borrowers) are especially important for the contract-intensive industries.

• Item Type: MPRA Paper
• Language: English
• Keywords: financial development; relationship-specific investment; growth
• Subjects: O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O40 - General; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

Baum, Christopher F., Mark E. Schaffer and Steven Stillman, 2003 "Instrumental variables and GMM: Estimation and testing," Stata Journal, Stata Corp LP, vol. 3(1), pp 1-31.

Beck,Thorsten, Asli Demirgüç-Kunt and Ross Levine, 2000, "A New Database on Financial Development and Structure," World Bank Economic Review 14, pp. 597-605.

Black, Sandra E. and Philip E. Strahan, 2002, "Entrepreneurship and Bank Credit Availability," Journal of Finance, American Finance Association, vol. 57(6), pp. 2807-2833

Boot, Arnoud W. A., 2000, "Relationship Banking: What do we know?", Journal of Financial Intermediation, 9, pp. 7-25.

Boot, Arnoud W. A., Stuart I. Greenbaum and Anjan V. Thakor, 1993, "Reputation and Discretion in Financial Contracting," American Economic Review, vol. 83(5), pp. 1165-1183

Boot, Arnoud W. A. and Anjan V. Thakor, 2000, "Can Relationship Banking Survive Competition?," Journal of Finance, vol. 55(2), pp. 679-713

Boyd, John H. and Edward C. Prescott, 1985, "Financial Intermediary-Coalitions," Research Department Staff Report 87, Federal Reserve Bank of Minneapolis

Caballero, Ricardo J. and Mohamad L. Hammour, 1998, "The Macroeconomics of Specifity," Journal of Political Economy, vol. 106(4), pp. 724-767

Cetorelli, Nicola, and Michele Gambera, (2001), "Banking Market Structure, Financial Dependence and Growth: International Evidence from Industry Data," Journal of Finance, vol. 56(2), pp 617-648.

Djankov, Simeon, Rafael La Porta, Florencio Lopez-de-Silanes and Andrei Shleifer, 2003, "Courts", Quarterly Journal of Economics 118, pp. 453-517.

Fama, F.,Eugene, 1985, "What's Different About Banks?", Journal of Monetary Economics,15(1), pp. 29-39.

Glaeser, Edward L., Rafael La Porta, Florencio Lopez-de-Silanes and Andrei Shleifer, (2004), "Do Institutions Cause Growth?", Journal of Economic Growth, pp. 271-303.

Grossman, Sanford, and Oliver Hart, 1986, "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration", Journal of Political Economy 94, pp. 691-719.

Hart, Oliver, 1995, "Firms, Contracts, and Financial Structure," Oxford University Press

Hart, Oliver, and John Moore, 1990, "Property Rights and the Nature of the Firm", Journal of Political Economy 98, pp. 1119-1158.

Hall, Robert, and Chad Jones, 1999, "Why Do Some Countries Produce So Much More Output per Worker then Others," Quarterly Journal of Economics, 114, pp. 83-116.

Heston, Alan, Robert Summers, and Bettina Aten, 2002, "Penn World Table Version 6.1", Center for International Comparisons at the University of Pennsylvania (CICUP).

Jayaratne, Jith and Philip E. Strahan, 1996, "The Finance-Growth Nexus: Evidence from Bank Branch Deregulation," The Quarterly Journal of Economics, Vol.111, pp 639-670.

Kahan, Marcel, 2006, "The Demand for Corporate Law: Statutory Flexibility, Judicial Quality, or Takeover Protection?" The Journal of Law, Economics and Organization, Vol. 22 (2), pp. 340-365.

Kaufmann,Daniel, Aart Kraay and Massimo Mastruzzi, 2008, "Governance Matters VII: Governance Indicators for 1996-2007". World Bank Policy Research June 2008.

Klein, Benjamin, Robert G. Crawford, and Armen A. Alchian, 1978, "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, vol. 21, pp. 297-326.

Kroszner, Randall S., and Philip Strahan, 1999, "What Drives Deregulation? Economics and Politics of the Relaxation of Bank Branching Restrictions," Quarterly Journal of Economics, pp.1437-67.

Laeven, Luc, Daniela Klingebiel, and Randall S. Kroszner, 2002, "Financial Crises, Financial Dependence, and Industry Growth," World Bank Policy Research Working Paper No. 2855

La Porta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer and Robert Vishny, 1997, "Legal Determinants of External Finance," Journal of Finance, LII, pp. 1131--1150.

------, 1998, "Law and Finance," Journal of Political Economy, CVI pp.1113--1155.

------, 1999, "The Quality of Government," Journal of Law, Economics, and Organization, XV, pp.222--279.

Levchenko, Andrei, 2007, "Institutional Quality and International Trade", Review of Economic Studies, 74:3, pp.791-819.

Levchenko, Andrei, Romain Ranciere and Mathias Thoenig "Growth and Risk at the Industry Level: the Real Effects of Financial Liberalization", Forthcoming, Journal of Development Economics.

Levchenko, Andrei, 2008, "International Trade and Institutional Change", mimeo, University of Michigan.

Levine, Ross, 2005, "Finance and Growth: Theory and Evidence.", Handbook of Economic Growth, Eds:Philippe Aghion and Steven Durlauf, The Netherlands: Elsevier Science.

Levine, Ross and Norman Loayza and Thorsten Beck, 2000, "Financial intermediation and growth: Causality and causes," Journal of Monetary Economics, vol. 46(1), pp. 31-77

Levine, Ross and Sara Zervos, 1998, "Stock Markets, Banks, and Economic Growth," American Economic Review, vol. 88(3), pp. 537-58.

Nicita, Alessandro and Marcelo Olarreaga, 2007, "Trade, Production, and Protection Database, 1976-2004," World Bank Economic Review, Vol. 21 (1), pp. 165-171.

Nunn, Nathan, 2007, "Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade," The Quarterly Journal of Economics, MIT Press, 122(2), pp 569-600

Ongena, Steven R.G. and David C. Smith, 1998, "Bank Relationships: A Review," in Zenios, S. A. and P. Harker (eds.), Performance of Financial Institutions (Cambridge University Press), pp. 221-258.

Pagan Adrian R. and Anthony D. Hall, 1983, "Diagnostic tests as residual analysis," Econometric Reviews, Taylor and Francis Journals, vol. 2(2), pp. 159-218.

Petersen, Mitchell A. and Raghuram G. Rajan, 1995, "The Effect of Credit Market Competition on Lending Relationships," The Quarterly Journal of Economics, vol. 110(2), pp.407-43.

Rajan, Raghuram G., 2005, "Has Financial Development Made the World Riskier?" Proceedings of the Jackson Hole Conference organized by the Federal Reserve Bank of Kansas City

Rajan, Raghuram G., 1998, "The Past and Future of Commercial Banking Viewed through an Incomplete Contract Lens," Journal of Money, Credit, and Banking, vol. 30(3), pp. 524-550.

Rajan, Raghuram G. and Luigi Zingales, 1998, "Financial Dependence and Growth",American Economic Review, 88(3), 559-86.

Rauch, James E., 1999, "Networks Versus Markets in International Trade," Journal of International Economics 48(1)),pp 7-35.

Robinson, Joan, 1952, "The Rate of Interest and other essays", London: Macmillan

Sachs Jeffrey and Pia Malaney, 2002,"The Economic and Social Burden of Malaria", Nature, Vol. 415, no. 6872

Schumpeter Joseph A., 1912, "Theorie der wirtschaftlichen Entwicklung", Lepzig, Germany: Dunker & Humblot

Shea, John S., 1997, "Instrument Relevance in Multivariate Linear Models: A Simple Measure", Review of Economics and Statistics, Vol. 79, no. 2, pp. 348-352.

Solow, Robert M., 1957, "Technical Change and the Aggregate Production Function." Review of Economics and Statistics, vol. 39(3), pp. 312-320.

Stock , James H. and Motohiro Yogo, 2002, "Testing for Weak Instruments in Linear IV Regression," NBER Technical Working Papers 0284, National Bureau of Economic Research, Inc.

Strahan, Philip, "The real effects of US banking deregulation", 2003, Federal Reserve Bank of St.Louis Review.

von Thadden, Ernst-Ludwig, 1995, "Long-Term Contracts, Short-Term Investment and Monitoring," Review of Economic Studies, vol. 62(4), pp 557-75.

Williamson, Oliver E., 1979, "Transaction Cost Economics: The Governance of Contractual Relations," Journal of Law and Economics, vol. 22, pp. 233-261.