Essays on development and the function of financial markets

Abstract

This thesis includes three empirical studies on financial development and the function of modern financial markets.

The first study investigates the impact of an alternative legal system on financial development in China. Although Xinfang is not part of the judicial system, and therefore is largely ignored by scholars studying the law and finance in China, Xinfang is a formal institution that addresses an array of commercial, contractual, property, and financial disputes and that often handles more cases than the judicial system. I construct the first cross-province, cross-time measures of Xinfang effectiveness and discover that differences in Xinfang are associated with differences in industry and firm financing patterns that are consistent with the law and finance view.

The second study examines the impact of the TseTse fly—which is unique to Africa and transmits an epidemic disease harmful to humans and lethal to livestock—on modern financial development in Africa. Exploiting newly georeferenced firm data across the world, I discover that firms in regions that meet the TseTse survival conditions have less access to external finance today and this relationship only exists in Africa. Further tests suggest a causal interpretation of the result. I also find that people are less likely to trust others, to use financial services, and to learn and adopt financial technologies in historically infested regions.

In the third study, I assess the impact of biased gender norms on the function of the trade credit markets. In particular, I examine the effects of female production workers on firms’ access to trade credits across the world. Using two sources of plausibly exogenous variations in gender bias and a cross-sectional analysis framework, I document that firms with more female production workers have less access to trade credits in countries with stronger gender beliefs that favor males. This relationship is largely driven by firms in industries with unexpected credit shortages and industries dominated by males. Since female firms rely more on informal finance, this study is relevant for policies that direct female firms towards formal credit markets in high gender-biased places.