Stock Market Development and Firm Financing Choices

Abstract

The authors empirically analyze the association between firm financing choices and the level of development of financial markets in 30 countries for the period 1980-91. For the whole sample, there is a statistically significant negative correlation between stock market development, as measured by the ratio of market capitalization to gross domestic product, and the ratios of both long-term and short-term debt to firms'total equity. For developed markets in the sample, further stock market development leads to a substitution of equity for debt financing. In developing markets, by contrast, large firms become more leveraged as the stock market develops, whereas the smallest firms appear not to be significantly affected by market development.

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