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Risk sharing and firm size: theory and international evidence

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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.

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  • Giannetti, Mariassunta, 2001. "Risk sharing and firm size: theory and international evidence," SSE/EFI Working Paper Series in Economics and Finance 0472, Stockholm School of Economics, revised 06 Nov 2001.
    • Handle: RePEc:hhs:hastef:0472
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    Cited by:

    1. Dennis W. Jansen & Ruby P. Kishan & Diego E. Vacaflores, 2013. "Sectoral Effects of Monetary Policy: The Evidence from Publicly Traded Firms," Southern Economic Journal, John Wiley & Sons, vol. 79(4), pages 946-970, April.
    2. Dennis W. Jansen & Ruby P. Kishan & Diego E. Vacaflores, 2013. "Sectoral Effects of Monetary Policy: The Evidence from Publicly Traded Firms," Southern Economic Journal, Southern Economic Association, vol. 79(4), pages 946-970, April.
    3. Dennis W. Jansen & Ruby P. Kishan & Diego E. Vacaflores, 2013. "Sectoral Effects of Monetary Policy: The Evidence from Publicly Traded Firms," Southern Economic Journal, John Wiley & Sons, vol. 79(4), pages 946-970, April.

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    More about this item

    Keywords

    risk sharing; firm size; financial constraints; financial development;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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