Democracy and access to finance in developing countries

Abstract

Purpose

The aim of this paper is to document the effect of democracy on the financing constraints faced by private firms.

Design/methodology/approach

This paper uses the data from the World Bank's Enterprise Surveys to test the arguments presented in this paper in a large sample of private firms from 92 developing countries.

Findings

The results show that firms headquartered in more democratic countries have better access to finance than firms headquartered in less democratic countries. The findings are robust to the comprehensive inclusion of relevant controls and to a number of sensitivity tests. The authors' findings highlight an important channel through which democracy can affect the business environment of a country.

Originality/value

The authors believe that this paper is an initial attempt to document the effect of democracy on the financing constraints faced by private firms.

Citation

Farooq, O. and Aktaruzzaman, K. (2023), "Democracy and access to finance in developing countries", Review of Behavioral Finance, Vol. 15 No. 6, pp. 947-969. https://doi.org/10.1108/RBF-07-2022-0168