2. Related Literature Our work is related to several strands of literature. The starting point is the so-called law and finance literature initiated by La Porta et al. (1998 )and Rajan and Zingales(1998) This literature focuses on the relationship between the institutional framework of a country and its financial development(see also La Porta et al. 1997, Demirguc-Kunt and Maksimovic 1998, and Carlin and Mayer, 2000 ). This literature has established that financial sector development is higher in countries with better legal systems and creditor rights because such environments increase the ability of lenders to finance firms. Related is the work by King and Levine(1993), Levine and Zervos(1998), and Beck et al. (2000) that has established an empirical link between financial development and economic growth, with a focus on the role of legal systems The second stram we draw on is the capital structure literature(Myers 1977 Titman and Wessels 1988, and Harris and Raviv 1991). This literature has established that real, tangible assets, such as plant and equipment, support more debt than intangib assets. In particular, fixed assets can support more long-term debt as they have more liquidation and collateralizable value. As intangibles have value only as part of a going concern, it follows that the debt-to-firm value ratio will be lower the larger the proportion of firm value represented by investment options(Myers 1977). Bradley et al. (1984)and Long and Malitz(1985) provide empirical support for the argument that a larger amount of intangible assets reduces the borrowing capacity of a firm. Rajan and Zingales(1995) and Demirguc-Kunt and Maksimovic (1999)show for firms in a cross-sectio countries that debt maturity and asset structures are related, with firms with more fixed assets being able to support more long-term debt Demirguc-Kunt and Maksimovic (1999)also show that firms in developing countries have a large share of fixed assets out of total assets, although they do not provide an explanation for it. This difference in asset composition for firms developing countries can have large implications for firm growth, in light of recent studies on the importance of different types of inputs in firm production. The growth literature has broadened the set of productive inputs from capital and labor( Solow 1956) to human capital and technology (Romer 1990, and Barro 1991, among others). In particular, Romer(1986, 1987)shows that technology exhibits increasing returns to scale4 2. Related Literature Our work is related to several strands of literature. The starting point is the so-called law and finance literature initiated by La Porta et al. (1998) and Rajan and Zingales (1998). This literature focuses on the relationship between the institutional framework of a country and its financial development (see also La Porta et al. 1997, Demirgüç-Kunt and Maksimovic 1998, and Carlin and Mayer, 2000). This literature has established that financial sector development is higher in countries with better legal systems and creditor rights because such environments increase the ability of lenders to finance firms. Related is the work by King and Levine (1993), Levine and Zervos (1998), and Beck et al. (2000) that has established an empirical link between financial development and economic growth, with a focus on the role of legal systems. The second strand we draw on is the capital structure literature (Myers 1977, Titman and Wessels 1988, and Harris and Raviv 1991). This literature has established that real, tangible assets, such as plant and equipment, support more debt than intangible assets. In particular, fixed assets can support more long-term debt as they have more liquidation and collateralizable value. As intangibles have value only as part of a going concern, it follows that the debt-to-firm value ratio will be lower the larger the proportion of firm value represented by investment options (Myers 1977). Bradley et al. (1984) and Long and Malitz (1985) provide empirical support for the argument that a larger amount of intangible assets reduces the borrowing capacity of a firm. Rajan and Zingales (1995) and Demirgüç-Kunt and Maksimovic (1999) show for firms in a cross-section of countries that debt maturity and asset structures are related, with firms with more fixed assets being able to support more long-term debt. Demirgüç-Kunt and Maksimovic (1999) also show that firms in developing countries have a large share of fixed assets out of total assets, although they do not provide an explanation for it. This difference in asset composition for firms in developing countries can have large implications for firm growth, in light of recent studies on the importance of different types of inputs in firm production. The growth literature has broadened the set of productive inputs from capital and labor (Solow 1956) to human capital and technology (Romer 1990, and Barro 1991, among others). In particular, Romer (1986, 1987) shows that technology exhibits increasing returns to scale