. Ravinder Tulsani’s reputation for excellence reflects his expertise as a strategic planner, who generates cultural transformation in business, spotlight on educating and motivating the workforce to achieve core business objectives

1. RAVINDER TULSIANI
Summary of
Finance

2. Introduction
2
Is there an important impact of financial
development on growth?
 leading growth-textbooks ignore the financial sector
 Merton Miller: there is a very obvious contribution of
financial markets to growth
 Robert Lucas: role of finance has been overstressed
Paper Contents
 first part provides overview about theoretical and
empirical research regarding above question
 second part summarizes historical and policy
determinants of financial development

3. Agenda
3
summary of paper contents
 review of theoretical works
 review of empirical works

4. Term „Financial Development“
4
 focus on five broad functions of the financial system:
(1) produce information and allocate capital
(2) monitor investments and exert corporate governance
(3) facilitate trading, diversification and management of risk
(4) mobilize and pool savings
(5) ease the exchange of goods and services
 „Financial Development“
= lower information, transaction and enforcement costs
~ better performance on financial functions
information,
transaction,
enforcement
costs
tax,
legal,
regulatory
system
financial
contracts,
markets,
intermediaries
influence on
allocation of
resources and
thus growth

5. (1) Producing Information and Allocating Capital
5
large information costs in evaluating of firms,
management and market conditions before
granting a loan
 Financial Intermediaries bundle efforts and reduce
costs (Boyd and Prescott, 1986)
 FI produce better information and fund more
promising firms and technologies (Greenwood and
Jovanovic, 1990)
 FI identify better entrepreneurs and innovators (several
papers)
 large and liquid stock markets set incentives to
research for unique information (several papers)
 imperfect capital markets impede efficient investment
in human capital (Galor and Zeira, 1993)

6. (2) Monitoring firms and exerting CG
6
Corporate Governance determines the degree to
which shareholders can monitor and influence the
use of their capital
 asymmetric information
 principal agent problems
 „free rider“ problems among minor shareholders
research on concentrated ownership
research on the role of financial intermediaries
 economies of scale in monitoring (Bencivenga and Smith,
1993)
 better handling of informational asymmetries (Sussman,
1993; Harrison, Sussman, and Zeira, 1999)
 monitoring of innovative activities (De La Fuente and Marin,
1996)

7. (3) Risk amelioration (cross-sectional risk)
7
diversification allows risk-averse investors to
invest in riskier, higher-return investments (Gurley
and Shaw, 1955; Patrick, 1966; Greenwood and
Jovanovic, 1990)
diversification can stimulate innovative activity
and thus technological change (King and Levine,
1993)

8. (3) Risk amelioration (liquidity risk)
8
liquidity = cost and speed of conversion of
financial instruments to purchasing power
some high-return projects require a long-run
commitment of capital
 Hicks (1969), Bencivenga, Smith and Starr (1995) on
Industrial Revolution
 Levine (1991) on the effects of liquid capital markets on
steady-state growth
 Bencivenga and Smith (1991) on the role of FI

9. (4) Pooling of Savings
9
Pooling = process of agglomerating capital from
many savers for investment
 works on the emergence and role of institutions:
 investment banks (Carosso, 1970)
 banks (Sirri and Tufano, 1995; Boyd and Smith, 1992;
Lamoreaux, 1995)
 pooling enables production at efficient scales (Sirri and
Tufano, 1995)
 works by Bagehot (1873)

10. (5) Easing trade
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higher specialization allows for technological
invention and growth (Smith, 1776)
 requires more transactions
 transaction and information costs
emergence of money (Smith, 1776; King and
Plosser, 1986; Williamson and Wright, 1994)
Greenwood and Smith (1996) on connections
between exchange, specialization, and innovation