READ and then write 550 words on the article “Financial Dependence and Growth”, by Raghuram G. Rajan and Luigi Zingales, The American Economic Review, 1998, Vol. 88, No. 3, pp. 559-586.
In the text you must answer to the following questions:
1. Ranjan and Zingales (1998) consider U.S listed firms to calculate their `External Finance Dependence’ variable. How is this index measured empirically? How do they justify using only `listed’ firms and only U.S firms to calculate `External Finance Dependence’ variable?
2. Describe Rajan and Zingales (1998)’s empirical strategy including the estimation equation. Discuss the importance of the fixed effects in the estimation. Explain how to interpret the estimates obtained and present the main conclusion of their paper.
3. A developing country decide to liberalise its equity market. Using a similar reasoning as in the article, what are the characteristics of the firms and sectors that are expected to grow the most and the least?
Type of assignment: Article