international trade described in Subsection 3.3.<sup>8</sup> To ensure the comparability of different measures capturing different aspects of financial vulnerability, we compute the measures in a unified way and normalize them to be between zero and one.<sup>9</sup> Following Rajan and Zingales (1998), we compute _Investment needs_ as the difference between capital expenditures (Compustat item 128) and cash flow (Compustat item 110), divided by capital expenditures.<sup>10</sup> This proxy captures the share of the necessary investment into physical capital that cannot be financed from internally generated funds and therefore requires external financing. The reliance on large US firms covered in Compustat in the computation assures that the resulting share reflects the investment that a representative firm in the industry truly requires but cannot finance itself. For smaller US firms and most other firms around the world, the observed use of external financing represents an equilibrium outcome between the firm’s demand and the available supply from local banks and stock markets. By contrast, large publicly traded firms in the US face only minimal frictions in accessing external finance so that the observed amount of their external funding represents a good measure of their actual financing needs (Rajan and Zingales 1998).

Following Raddatz (2006), we compute _Liquidity needs_ as the median ratio of total inventories to sales (i.e. dividing Compustat item 3 by Compustat item 12). A higher

> 8 The use of more broadly defined sectors in the original papers fits with the prevailing aggregate focus of the finance-growth literature at that time. Existing trade literature has mostly followed these broader industries when using the difference-in-difference identification strategy adopted in this paper. More recently, both finance and trade papers using disaggregated data have started to recompute some of these measures for narrowly defined industrial sectors. Crin`o and Ogliari (2017) recompute investment needs and asset tangibility for 273 SIC industries in their study on financial frictions and product quality in international trade. Tong and Wei (2011) recompute investment needs and liquidity needs for around 250 SIC industries when investigating the impact of financial crisis on the firm-level stock market returns.

> 9 In the first step, we compute median value of a given measure for each US firm in Compustat over the period 1989-2006. In the second step, we look at the computed measures for all firms in a given industry and take the value of the median firm to represent the industry, following the approach of Raddatz (2006). Other approaches used in the original papers include taking mean rather than median in the first step or eliminating the two-steps procedure altogether and take an average value across all firm-year observations in a given industry in just one step. More fundamentally, none of the measures in the original papers is normalized in order to allow for better comparability with other measures. This is only natural given that each of these papers focuses primarily on one particular transmission channel and the measure of financial vulnerability associated with it.

> 10 Compustat reports data for different firms and years in different formats. For formats 1/2/3, we compute the cash flow as the sum of following variables: funds from operations (operating income + depreciation), decreases in inventories, decreases in receivables, and increases in payables. For format 7, we use the variable cash flow directly provided in Compustat.

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