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Finance and Development

Paper Session

Sunday, Jan. 5, 2020 8:00 AM - 10:00 AM (PDT)

Manchester Grand Hyatt, Seaport F
Hosted By: American Finance Association
  • Chair: Emily Breza, Harvard University

Financial Development, Labor Markets, and Aggregate Productivity: Evidence from Brazil

Julia Fonseca
Princeton University


We estimate the effect of an increase in the availability of bank credit on the employment and the earnings of high- and low-skilled workers. To do so, we consider a bankruptcy reform that increased the legal protections of secured creditors, which led to an expansion of bank credit to Brazilian firms. We use detailed administrative data and an empirical strategy that compares changes in outcomes for financially constrained firms, which were affected by the bankruptcy reform, with unconstrained firms, which were largely unaffected by the reform. Following the bankruptcy reform and subsequent expansion in credit, constrained firms increased employment, especially of high-skilled workers. We also observe an increase in earnings, with gains concentrated on skilled workers and on workers who were employed at constrained firms prior to the reform. To rationalize these findings, we design a model in which heterogeneous producers face constraints in their ability to borrow and have production functions featuring capital-skill complementarity. Using this framework, we estimate that the reallocation of resources induced by the bankruptcy reform accounts for 36 percent of the observed increase in aggregate productivity in Brazil during the 2000s.

Investor Protection, Corporate Investment, and Valuation

Yingcong Lan
Cornerstone Research
Xiaoji Lin
University of Minnesota
Neng Wang
Columbia University
Jinqiang Yang
Shanghai University of Finance and Economics


Many firms around the world are managed by controlling shareholders who are entrenched with significant wealth exposures to their own illiquid businesses. Lacking investor protection inevitably causes concentrated insiders' equity ownership. Financial under-development induces significant under-diversification costs for the insiders. We analyze the economic consequences of imperfect investor protection and financial under-development for both the firms' diversified outside investors and controlling shareholders by developing a tractable dynamic model. The key mechanism is the insiders' tradeoffs between their private benefits and under-diversification costs. We find empirical evidence consistent with the model predictions. In particular, we show that in countries with better investor protection or with more developed financial markets, i) corporations invest more, have higher Tobin's q and have lower expected stock returns; ii) corporate investment is more sensitive to Tobin's q; iii) the effect of firms' insider ownership on investment and Tobin's q is more negative; and iv) Tobin's q predicts expected stock returns less negatively whereas corporate investment predicts expected stock returns more negatively, than countries with weaker investor protection and less developed financial markets.

Corporate Political Connections and the Finance-Growth Nexus: Evidence from China

Shuo Yan
Southern University of Science & Technology


This paper exploits a regulation reform that decreased the corporate political connections in China, as well as variations in the finance-growth nexus across Chinese regions, to study the impact of corporate political connections on the finance-growth nexus. I match firm-level political connections data with loan-level data from all the Chinese banks to listing firms in China to investigate how the firm's political connection level affects its access to bank loans. Then I link the marginal effect of political connection level on firm's access to bank loans on the regional-level with the finance-growth nexus in the corresponding region. I found that in the years after the reform decreases the corporate-political connections in China, the firms had higher political ties prior to the reform experienced a greater decline in access to bank loans relative to their peers. Meanwhile, all the Chinese regions enjoyed a significant improvement in financial development's positive impact on economic growth, but the improvement was stronger for the regions where political connections brought out more benefit to firm's access to bank loans prior to the reform. These evidences suggest that corporate political connections obstruct the positive correlation between finance and growth via distorting firms' access to loans. Robustness checks demonstrate that the results are not driven by omitted firm-level characteristics, omitted regional variables, or parallel trends.

Cash is King: The Costs of Digitization

Bhavya Aggarwal
Reserve Bank of India
Nirupama Kulkarni
Reserve Bank of India
Subatra Ritadhi
Reserve Bank of India


This paper examines whether increasing the costs of cash transactions can induce households to
switch to the formal economy through digital payments, using the demonetization episode in India as
a laboratory. The demonetization episode discontinued 86 percent of the cash in circulation overnight,
causing a temporary increase in the cost of cash transactions. Using a difference-in-difference design,
this paper shows that areas more exposed to the cash shortage witnessed a 22 percent increase in
digital payments and these effects persisted over the long term. However, areas with high informality
witnessed an increase in digital transactions only when the requisite financial infrastructure in the form
of point-of-sales terminals were already in place. Further, we do not find that the demonetization had
any spillover effects on household participation in financial assets, relative to gold and real estate.
Our results suggest that existing levels of financial infrastructure are an important determinant of
whether interventions such as demonetization can successfully induce households to switch to the
formal economy over the long run.
Cynthia Kinnan
Tufts University
Emily Breza
Harvard University
Xiao Yu Wang
Duke University
Sean Higgins
Northwestern University
JEL Classifications
  • G3 - Corporate Finance and Governance