We investigate whether firms’ access to external financing to fund growth differs in market-based and bank-based financial systems. Using firm-level data for 40 countries, we compute the proportion of firms in each country relying on external finance and examine how that proportion differs across financial systems. We find that the development of a country's legal system predicts access to external finance, and stock markets and the banking system affect access to external finance differently. However, we find no evidence that firms’ access to external financing is predicted by several proxies for relative development of stock markets to the development of the banking system.

We examine firm debt maturity in 30 countries during the period 1980–1991. In countries with active stock markets, large firms have more long-term debt. Stock market activity is not correlated with debt levels of small firms. By contrast, in countries with a large banking sector, small firms have less short-term debt and their debt is of longer maturity. Variation in the size of the banking sector is uncorrelated with the capital structures of large firms. Government subsidies to industry are positively related and inflation is negatively related to the use of long-term debt. We also find evidence of maturity matching.

Issue size choice and underpricing in mutual‐to‐stock conversions of thrifts are explained as a function of growth opportunities, perquisite consumption, and proprietary information. We provide evidence that thrifts with greater growth opportunities choose larger issue size and experience higher after‐market price appreciation. This finding persists when we allow for investors' inferences about managers' proprietary information. Variables that explain underpricing in typical initial public offerings are significant by themselves but lose significance when combined with the issue size choice variables. Managerial holdings and the offer price do not act as dissipative signals of value in thrift conversions.

We investigate how differences in legal and financial systems affect firms' use of external financing to fund growth. We show that in countries whose legal systems score high on an efficiency index, a greater proportion of firms use long‐term external financing. An active, though not necessarily large, stock market and a large banking sector are also associated with externally financed firm growth. The increased reliance on external financing occurs in part because established firms in countries with well‐functioning institutions have lower profit rates. Government subsidies to industry do not increase the proportion of firms relying on external financing.

Theory does not predict an unambiguous relationship between a country’s financial and legal institutions and firm size. Using data on the largest industrial firms for 44 countries, we find that firm size is positively related to financial intermediary development, the efficiency of the legal system and property rights protection. We do not find any evidence that firms are larger in order to internalize the functions of the banking system or to compensate for the general inefficiency of the legal system.

We develop a novel 10-K text-based model of product life cycles and examine firm investment policies. Conditioning on the life cycle substantially improves the power of q to explain investment and reveals a natural ordering of investments over the life cycle. While R&D and CAPX sensitivity are high early in the cycle, acquisitions arise as products mature, and divestitures and product extension investments arise as products decline. q-sensitivities that condition on the life cycle can vary by as much as 400% from traditional sensitivities. The life cycle framework further reveals an enriched relationship between competition, investment, and corporate profits.

We score 10-K text to obtain annual measures of financial constraints, with separate measures for firms reporting equity and debt financing issues. Equity market constraints are associated with firms funding growth opportunities, have more severe consequences for the firm following large unexpected negative shocks, and are likely driven by informational asymmetries. A significant population of firms reporting equity market constraints also declare that they possess material undisclosed proprietary information. Constraints in the debt markets are distinct and are linked to covenant violations. Our measures outperform others used in the literature in predicting investment cuts following negative shocks.

The effect of financial policy on a firm’s incentives to maintain its reputation for producing a high-quality product is analyzed. It is demonstrated that in certain situations debt will reduce a firm’s ability to credibly offer high-quality products and, as a consequence, will reduce its value. However, for firms with assets that have high salvage values in liquidation, debt may increase their ability to credibly offer high-quality products and, therefore, increase their values.