Financial Markets Development and Financing Choice of Firms: New Evidence from Asia

Inder Sekhar Yadav (), Debasis Pahi () and Rajesh Gangakhedkar ()
Additional contact information
Inder Sekhar Yadav: Indian Institute of Technology Kharagpur (IIT Kharagpur)
Debasis Pahi: Indian Institute of Technology Kharagpur (IIT Kharagpur)
Rajesh Gangakhedkar: Osmania University Campus

Asia-Pacific Financial Markets, 2019, vol. 26, issue 4, No 2, 429-451

Abstract: Abstract This paper investigates the effects of financial markets development on the financing choice of firms in developing and developed Asian market economies. The panel data regression models were used for a mean total of 6506 non-financial listed companies during 1995–2016 for 12 Asian economics. The estimated econometric models included short-term, long-term and total debt-equity ratios as dependent variables which were regressed on financial markets development variables (such as banking sector development and stock market development indicators) along with macroeconomic variables (such as inflation, GDP growth, FDI and firm-specific variables (such as ratio of total assets to GDP, ratio of dividends to total assets and ratio of net sales to net fixed assets) as control variables. Also, financing choice of firms in developed and developing stock markets was estimated by splitting the sample into subsamples of developing and developed stock markets. The financial development indicators such as domestic credit to private sector by banks and stock market capitalization exhibited contrasting differences between the selected developing and developed Asian economies. The econometric results indicated that the banking sector and stock market development indicators significantly have opposite effects on the financing choice of the selected firms: banking variable is associated with a rise in the debt-equity ratio whereas stock market variable is associated with a fall in leverage ratio. The econometric effects of stock market development on firms financing choices in developing and developed stock markets showed a remarkable divergence. The evidence indicated that the estimated coefficient of the banking sector indicator in the developed stock market subsample was consistently negative for all the three leverage ratios whereas the coefficient in the developing stock market subsample was positive and significant. The important conclusion of the study is that though banking sector and stock market play different roles are however, complementary to each other suggesting that the policymakers should aim to develop banking sector and stock market simultaneously which will help firms to design their optimal financing choices.

Keywords: Financial development; Financing choice; Leverage ratio; Panel data; Asia (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://link.springer.com/10.1007/s10690-019-09273-5 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:apfinm:v:26:y:2019:i:4:d:10.1007_s10690-019-09273-5

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/10690/PS2

DOI: 10.1007/s10690-019-09273-5

Access Statistics for this article

Asia-Pacific Financial Markets is currently edited by Jiro Akahori

More articles in Asia-Pacific Financial Markets from Springer, Japanese Association of Financial Economics and Engineering
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().