The Stockmarket as a Source of Finance: A Comparison of U.S. and Indian Firms

Abstract

In seeking funding, a firm's main choice is between external and internal financing. And, says the author, the evidence suggests that the stock market plays only a limited role providing finance for both U.S. and Indian firms. The author finds that internal finance plays less of a role for Indian firms than for U.S. firms - and external debt a bigger role. This is consistent with theoretical predictions, given that information and agency problems are less severe for Indian firms than for U.S. firms. (India's financial system is predominantly bank-oriented, more like German and Japanese financial systems than American and British systems.) The author's estimate of the role of the stock market as a source of finance is lower than other estimates, partly because of methodological approach: he studied sources and uses of funds, rather than the financing of net asset growth and capital expenditures. To the extent that these findings for India are generalizable to the other developing countries - analysis was restricted to the stock market's role in providing finance - the author concludes that the development of stock markets is unlikely to spur corporate growth in developing countries. And there is a caveat: foreign investors have played only a limited role in the slow-paced privatization of India's state-owned enterprises - although in recent years, despite delayed reform of the securities market, foreign institutional investors have begun to invest more. In emerging markets in Eastern Europe and LatinAmerica, foreign investors have played a much more active role in privatization, chiefly by investing in those stock markets.

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