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Financial markets and the financing choice of firms: Evidence from developing countries

2004; Elsevier BV; Volume: 15; Issue: 1 Linguagem: Inglês

10.1016/j.gfj.2003.10.004

1873-5665

Sumit Agarwal, Hamid Mohtadi,

Financial Literacy, Pension, Retirement Analysis

We study the role of financial market development in the financing choice of firms in developing countries using a dynamic panel approach with aggregate firm-level data. The results suggest that equity market development favors firms' equity financing over debt financing, while banking sector development favors debt financing over equity financing, as one would expect. However, surprisingly, equity markets exhibit somewhat stronger influence in the short run than they do over the long run. Results from the dynamic panel model show that if both elements of the financial sector develop simultaneously, the long-run debt–equity ratio, while rising, will converge to a stable value.