results obtained controlling for this mechanism, reported in column (4), show both that more capital intensive industries do not appear to be relatively more vulnerable to financial underdevelopment<sup>45</sup> and that the consideration of this channel does not affect the coefficient of the interaction between financial development and liquidity needs.

Differences in human capital or in the use of technology across sectors may also be related to the effect of financial development in sectorial volatility. Sectors that are more human capital intensive may have large liquidity needs because they have expensive payrolls.<sup>46</sup> Similarly, to the extent that technologically intensive products are complex and use expensive inputs, the use of technology will be correlated with a sector’s liquidity needs. In addition, these characteristics may also affect a sector’s vulnerability to financial underdevelopment independently of their relation to liquidity needs: as moral hazard and hold-up problems are probably more important in sectors that are more human capital intensive, these sectors are more likely to be financially constrained.<sup>47</sup> Results from including the interaction between financial development and human capital intensity and technology use are reported in columns (5) and (6) respectively.<sup>48</sup> Even though the coefficients of the human capital and technology interactions have the right sign and are significant at conventional levels, the coefficient of the liquidity needs interaction is largely unaffected.

Another potential cause of concern is the relation between an industry’s volatility and its level of inventories. One reason why firms keep inventories is to smooth fluctuations in demand (see for example Blinder and Maccini (1990) or Ramey (1989)). So, high volatility industries are likely to have larger inventories and to depend more on financial markets to smooth demand fluctuations. In other words, the main determinant of an industry’s dependence on financial markets may be the variance of its liquidity needs instead of their average. The results obtained when the interaction between a measure of an industry’s intrinsic volatility and financial development is added to the main specification are reported in column (7).<sup>49</sup> The coefficient on the interaction of financial development and industry volatility suggests that high volatility industries increase their relatively volatility in underdeveloped financial markets, but the consideration of this effect does not affect the coefficient of the liquidity needs

> 45An industry’s level of capital intensity was computed as the ratio of capital per worker for the same industry in the U.S., following the same assumptions used to compute an industry’s level of liquidity needs. As in the case of the liquidity needs measure, even though the relative supply of capital and labor is surely going to affect the ratio of capital per worker for different countries, all that is needed is that the relative ranking across industries is preserved.

> 46See the argument in Section 4.

47The same argument would apply to the use of technology, to the extent that it is correlated with human capital intensity (see Autor et al. (1998)).

> 48The human capital intensity measure was built using data on the school composition of the labor force from Autor et al. (1998). Technology use at the sectoral level was also obtained from Autor et al. (1998).

> 49An industry’s intrinsic level of volatility was estimated using the volatility of the same industry in the U.S.

36