Financial Development And Firm Dynamics

Since the reform and opening up in 1978, China’s financial intermediation development has made great achievements, and the development level of financial entities also gradually improve. According to the latest data from national bureau of statistics (NBS), China’s total deposits of fund sources of financial institutions as a share of GDP has increased from 31.69% in 1978 to 179.05% in 2014. And total loans of fund uses of financial institutions as a share of GDP has increased from 51.85% in 1978 to 128.44% in 2014, while the personal deposits among total deposits of fund sources of financial institutions as a share of GDP has increased from 5.78% in 1978 to 79.60% in 2014.The raising level of financial development plays an important role in increasing employment, promoting economic growth of China. But, as you can see, at present the service efficiency of our country’s financial system is still very low, and credit constraints problems facing small and medium-sized enterprises are still outstanding.In view of the importance of financial development to the enterprise’s growth, many scholars have conducted a series of related research. But, at present, there is little research focusing on the relationships between financial development and different size’s enterprise’s financing options and growth rate of in our country, and using more detailed micro firm level data to study these relationships is even less. Therefore, this paper empirical analyzes the effect of region’s financial development on firms’ scale, financing options, and growth rate, based on China’s industrial enterprises survey data in 2004. The paper also use deposit, credit, savings deposit and corporate deposit to express financial development, and ordinary least squares to estimate the model. The empirical results show that:the leverage of relatively small firms is smaller than larger firms. But, as the improvement of regional financial development level, the leverage difference between small and large firms rises. To the contrary, small firms have a bigger growth rate than larger firms. However, as the improvement of regional financial development level, the growth rate difference between small and large firms shrinks.The empirical analysis in this paper also controls the influence of new companies. The results show that financial development has a different influence to the size-leverage and size-growth rate for new entrants and incumbent firms. Finally, through a series of sensitivity analysis, the results are robust.Why financial development has such an influence to the firm’s financing choice and growth rate? This is because that credit constraints can distort the allocation of firms’ resources, and increase corporate’s borrowing costs and the risk of default. So these can make the firm shrink to an inefficient level, so the leverage ratio is relatively low. But its growth rate is higher, because companies can expand to increase their output. With the improvement of the level of financial development, the enterprise financing ability enhances. And the small firms will increase their scale, so the leverage difference between small firms and larger firms is increasing. While the scale of the enterprise can also increase to an efficient level, so the growth rate of all companies will tend to be equal. The growth difference of small and larger firms shrinks.In conclusion, this study not only enrich the theoretical research of related finance-enterprise growth, but also has an important reference value to the government’s decisions.