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of the real economy. more specifically, we find that in well - developed and deep financial systems, sectors highly dependent on external sources of funding tend to experience a greater contraction during a banking crisis than do externally dependent sectors in countries with shallower financial systems. in other words, sectors of the real economy that rely heavily on external finance ( that is, do not fund capital expenditures through cash flow ) tend to experience a substantially slower growth of value added during a banking crisis than those sectors that do not rely so heavily on external funding. this effect is more pronounced in countries with more developed financial systems. our results hold for a wide group of countries and over a long time span, but as i note below, have particular relevance to emerging market countries. while these results are consistent with a so - called credit channel impact of banking crises on real economic activity, there are further implications of the " credit channel " view that we explore in more detail. among firms that depend heavily on outside financing, young firms with short histories and firms with a large fraction of hard - to - measure intangible assets, for example, may have particular difficulties raising funds from the market due to information problems. instead, such firms would tend to depend heavily on banks and other intermediaries for funding. consistent with this, we find a greater negative impact of banking crises on growth for industries dominated by young firms that are highly dependent on external finance and for industries with high levels of intangible assets. while all of these results are consistent with a " credit channel " view of the impact of banking crises on real economic activity, we certainly need to explore some alternative explanations before drawing final conclusions. in particular, many factors may be correlated with the level of financial development of a country, so we want to make sure that the level of financial development is not simply standing in for something else. the differences in financial development, for example, can arise from historical, political, cultural, and legal reasons. there is a well - developed literature emphasizing, for instance, that the nature of a country's legal system and the manner in which laws are enforced can have an effect on the development of its financial system. 9 similarly, other country - specific factors also might have an influence on how financial institutions and markets behave. if one of these factors, rather than financial development, is driving the results, we might have to interpret those results differently. as a way to try to address such questions of interpretation, we controlled for the quality of