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Corporate finance in developing countries: New evidence for India

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  • Cobham, David
  • Subramaniam, Ramesh

Abstract

Financing of corporate growth has generally not been paid much attention in the development economics literature. Recent analysis of the Emerging Markets Data Base of the International Financial Corporation suggests that corporate financing patterns in India, among a select group of other developing countries, are different from those in developed countries. Based on the data for a sample of the largest firms, these analyses provide evidence that Indian firms make more use of equity financing than firms in developed countries. These results have been used to argue in favour of investing heavily in the development of stock markets in developing firms. In this paper, we investigate the possibility that such an analysis could be too sample-specific in that the largest firms do not represent all of the Indian private corporate sector. Our analysis, based on sectoral and cumulative firm-level data for India, suggests that while firms do make a significant use of equity issues, the nature of equity financing may be different in an environment in which a number of firms are not listed on stock exchanges but may be issuing equity. The results show that bank loans and internal finance are more important sources of corporate financing. Sectoral and firm-level data from the United Kingdom are utilized o compare the behaviour of Indian firms with that of firms in developed countries, for which there is a rich literature on financing corporate growth. We conclude that India is not obviously very different from the low internal finance developed countries and that, since a large part of equity issues are by unlisted firms, the gains from the promotion of stock markets may be limited.

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Bibliographic Info

Article provided by Elsevier in its journal World Development.

Volume (Year): 26 (1998)
Issue (Month): 6 (June)
Pages: 1033-1047

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Handle: RePEc:eee:wdevel:v:26:y:1998:i:6:p:1033-1047

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References

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  1. Atje, Raymond & Jovanovic, Boyan, 1993. "Stock markets and development," European Economic Review, Elsevier, vol. 37(2-3), pages 632-640, April.
  2. Rajan, Raghuram G & Zingales, Luigi, 1995. " What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-60, December.
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  5. Samuel, Cherian, 1996. "The stockmarket as a source of finance : a comparison of U.S. and Indian firms," Policy Research Working Paper Series 1592, The World Bank.
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  8. Mayer, Colin, 1987. "New Issues in Corporate Finance," CEPR Discussion Papers 181, C.E.P.R. Discussion Papers.
  9. V. Sundararajan, 1987. "The Debt-Equity Ratio of Firms and the Effectiveness of Interest Rate Policy: Analysis with a Dynamic Model of Saving, Investment, and Growth in Korea," IMF Staff Papers, Palgrave Macmillan, vol. 34(2), pages 260-310, June.
  10. Colin Mayer, 1990. "Financial Systems, Corporate Finance, and Economic Development," NBER Chapters, in: Asymmetric Information, Corporate Finance, and Investment, pages 307-332 National Bureau of Economic Research, Inc.
  11. Singh, A. & Hamid, J., 1992. "Corporate Financial Structure in Developing Countries," Papers 1, World Bank - International Finance Corporation.
  12. Jenkinson, T & Corbett, J, 1997. "How is Investment Financed? A Study of Germany, Japan, UK and US," Papers 16, American Institute for Contemporary German Studies-.
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Citations

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Cited by:
  1. Singh, Ajit, 2001. "Corporate financing patterns in emerging markets in the 1980s and the 1990s," MPRA Paper 53663, University Library of Munich, Germany.
  2. Saumitra, Bhaduri, 2012. "Why do firms issue equity? Some evidence from an emerging economy, India," MPRA Paper 38043, University Library of Munich, Germany.
  3. Singh, Ajit, 1998. "Liberalisation, the stock market and the market for corporate control: a bridge too far for the Indian economy?," MPRA Paper 54929, University Library of Munich, Germany.
  4. Singh, Ajit & Weisse, Bruce A., 1998. "Emerging stock markets, portfolio capital flows and long-term economie growth: Micro and macroeconomic perspectives," World Development, Elsevier, vol. 26(4), pages 607-622, April.
  5. Samuel, Cherian, 1996. "Internal finance and investment : another look," Policy Research Working Paper Series 1663, The World Bank.
  6. Petia Topalova, 2004. "Overview of the Indian Corporate Sector: 1989-2002," IMF Working Papers 04/64, International Monetary Fund.
  7. International Monetary Fund, 2005. "Monetary Policy and Corporate Behaviour in India," IMF Working Papers 05/25, International Monetary Fund.
  8. Singh, Ajit, 2003. "Corporate governance, corporate finance and stock markets in emerging countries," MPRA Paper 24302, University Library of Munich, Germany.
  9. Guanqun Tong & Christopher Green, 2005. "Pecking order or trade-off hypothesis? Evidence on the capital structure of Chinese companies," Applied Economics, Taylor & Francis Journals, vol. 37(19), pages 2179-2189.
  10. Singh, Manohar & Nejadmalayeri, Ali & Mathur, Ike, 2007. "Performance impact of business group affiliation: An analysis of the diversification-performance link in a developing economy," Journal of Business Research, Elsevier, vol. 60(4), pages 339-347, April.
  11. Saumitra Bhaduri, 2002. "Determinants of corporate borrowing: Some evidence from the Indian corporate structure," Journal of Economics and Finance, Springer, vol. 26(2), pages 200-215, June.
  12. Santonu Basu, 2006. "Structural Problems in Financing Development: Issues Relating to India," International Review of Applied Economics, Taylor & Francis Journals, vol. 20(1), pages 85-101.
  13. Ajit Singh, 2003. "Competition, corporate governance and selection in emerging markets," Economic Journal, Royal Economic Society, vol. 113(491), pages F443-F464, November.
  14. Ghosh, Saibal & Sensarma, Rudra, 2004. "Does monetary policy matter for corporate governance? Firm-level evidence for India," MPRA Paper 19756, University Library of Munich, Germany.

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