SSE/EFI Working Paper Series in Economics and Finance
Risk sharing and firm size: theory and international evidence
Abstract: This paper investigates the relationship between financial
development and firm size. The model shows that the efficiency of the
financial system, measured by the level of monitoring costs, affects the
extent of risk sharing within an economy and through this channel the
availability of external finance to growing firms. If the provision of
finance to projects is concentrated in few individuals and firm shocks are
idiosyncratic, the risk premium is likely to rise with the amount of funds
firms demand. As a consequence, keeping constant the level of opacity and
risk, firms with better growth opportunities face higher costs of external
finance in countries where the financial system does not favor risk
sharing; this limits firm size. Empirical evidence is also provided.
Financial constraints appear more stringent for firms whose optimal size is
larger in countries where the financial system is less developed.
Keywords: risk sharing; firm size; financial constraints; financial development; (follow links to similar papers)
JEL-Codes: G30; O16; (follow links to similar papers)
37 pages, November 1, 2001, Revised November 6, 2001
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