Financial dependence and growth

This paper examines whether financial development facilitates economic growth by scrutinizing one rationale for such a relationship: that financial development reduces the costs of external finance to firms. Specifically, we ask whether industrial sectors that are relatively more in need of external finance develop disproportionately faster in countries with more-developed financial markets. We find this to be true in a large sample of countries over the 1980's. We show this result is unlikely to be driven by omitted variables, outliers, or reverse causality.