Financial market development and corporate financing: evidence from emerging market economies

Abstract

Purpose – The purpose of this paper is to examine the effects of financial market development on corporate financing of emerging market firms to ascertain whether or not interactions in the financial market has any impact on the available choice of financing of firms. Design/methodology/approach – Panel data covering the period 1990-2006 for 34 emerging market economies were analyzed within the framework of Pesaran's dynamic fixed effect model and the pooled mean group estimator to capture the short- and long-run effects of the covariates on the endogenous variables. Findings – The findings of the research indicate significantly that the direction and magnitude of the impact of financial market development and macroeconomic variables on capital structure vary with the maturities of the security issue. It is also documented that firm level variables such as profitability, investment opportunity, asset tangibility and risk are equally important in predicting firms' capital structure decisions. The findings also indicate that economy wide variables such as gross domestic product per capita are significant predictors of financing choices of firms. The results of the study generally support existing literature on the impact of financial market development, macroeconomic variables and certain firm level factors on capital structure. Originality/value – The paper considers unique data from emerging market economies over a 17-year period.Corporate finances, Emerging markets, Financial markets, Macroeconomics