Financial Development and Allocation of External Finance

We investigate the role of financial system to facilitate efficient allocation of resources into perspective projects. Employing micro-level data on European firms in 1996-2005 period, we provide evidence that firms in industries with the best growth opportunities use more external finance in financially more developed countries. Our results are robust to the choice of proxy for growth opportunities and to controlling for technology determinants of external finance. Furthermore, we show that the importance of technological factors decreases once growth opportunities are controlled for, which confirm hypothesis that used measures of technological determinants of external finance are partly driven by growth opportunities.