point D and B is not only due to a lack of finance effect, but also due to an asset substitution effect. The two effects may not only be different, they may also have different and complementary effects on final firm growth. The empirical question is whether the asset substitution effect is present, how it can be differentiated from the law and finance effect, and what its quantitative importance might be Note that in our example firms in countries with a well-developed financial sector but poor protection of property rights would choose point E in Figure 1. Thus, point illustrates the case where the finance effect is absent and the deviation from the optimal llocation(point D)can be contributed fully to the asset substitution effect that arises from poor property rights7 point D and B is not only due to a lack of finance effect, but also due to an asset substitution effect. The two effects may not only be different, they may also have different and complementary effects on final firm growth. The empirical question is whether the asset substitution effect is present, how it can be differentiated from the law and finance effect, and what its quantitative importance might be. Note that in our example firms in countries with a well-developed financial sector but poor protection of property rights would choose point E in Figure 1. Thus, point E illustrates the case where the finance effect is absent and the deviation from the optimal allocation (point D) can be contributed fully to the asset substitution effect that arises from poor property rights