The diffusion of financial supervisory governance ideas

Who is watching the financial services industry? Since 1980, there have been multiple waves of thought about whether the ministry of finance, the central bank, a specialized regulator or some combination of these should have supervisory authority. These waves have been associated with the convergence of actual practices. How much and through what channels did internationally promoted ideas about supervisory 'best practice' influence institutional design choices? I use a new dataset of 83 countries and jurisdictions between the 1980s and 2007 to examine the diffusion of supervisory ideas. With this data, I employ Cox Proportional Hazard and Competing Risks Event History Analyses to evaluate the possible causal roles best practice policy ideas might have played. I find that banking crises and certain peer groups can encourage policy convergence on heavily promoted ideas

Do Financing Constraints Matter for R&D?

Information problems and lack of collateral value should make R&D more susceptible to financing frictions than other investments, yet existing evidence on whether financing constraints limit R&D is decidedly mixed, particularly in the studies of non-U.S. firms. We study a large sample of European firms and also find little evidence of binding finance constraints when we estimate standard investment-cash flow regressions. However, we find strong evidence that the availability of finance matters for R&D once we directly control for: (i) firm efforts to smooth R&D with cash reserves and (ii) firm use of external equity finance. Our study provides a framework for evaluating financing constraints when firms rely extensively on external finance and endogenously manage buffer stocks of liquidity to keep investment smooth, and our findings show that controlling for this smoothing behavior is critical for uncovering the full effect of financing constraints. Our findings also indicate a major role for external equity in financing R&D, highlighting a causal channel through which stock market development and liberalization can promote economic growth by increasing firm-level innovative activity.This is an accepted manuscript from European Economic Review, 2012 56(8); 1512-1529. DOI: 10.1016/j.euroecorev.2012.07.007. Posted with permission.</p