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Corporate Finance in Developing Countries: New Evidence for India

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  • David Cobham
  • Ramesh Subramaniam

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

Paper provided by Centre for Research into Industry, Enterprise, Finance and the Firm in its series CRIEFF Discussion Papers with number 9512.

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Date of creation: Oct 1995
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Handle: RePEc:san:crieff:9512

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Keywords: corporate financing; firm-size effects; equity markets;

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References

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  1. Gertler, Mark, 1988. "Financial Structure and Aggregate Economic Activity: An Overview," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(3), pages 559-88, August.
  2. 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.
  3. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-92, July.
  4. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
  5. 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.
  6. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  7. Atje, Raymond & Jovanovic, Boyan, 1993. "Stock markets and development," European Economic Review, Elsevier, vol. 37(2-3), pages 632-640, April.
  8. Singh, A. & Hamid, J., 1992. "Corporate Financial Structure in Developing Countries," Papers 1, World Bank - International Finance Corporation.
  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. Mayer, Colin, 1987. "New Issues in Corporate Finance," CEPR Discussion Papers 181, C.E.P.R. Discussion Papers.
  11. 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-.
  12. 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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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. 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.
  3. Singh, A. & Weisse, B. A., 1998. "Emerging Stock Markets, Portfolio Capital Flows and Long-term Economic Growth: Micro and Macroeconomic Perspectives," Accounting and Finance Discussion Papers 98-af40, Faculty of Economics, University of Cambridge.
  4. Samuel, Cherian, 1996. "Internal finance and investment : another look," Policy Research Working Paper Series 1663, The World Bank.
  5. International Monetary Fund, 2005. "Monetary Policy and Corporate Behaviour in India," IMF Working Papers 05/25, International Monetary Fund.
  6. Ajit Singh, 2002. "Competition, corporate governance and selection in emerging markets," ESRC Centre for Business Research - Working Papers wp247, ESRC Centre for Business Research.
  7. Saumitra, Bhaduri, 2012. "Why do firms issue equity? Some evidence from an emerging economy, India," MPRA Paper 38043, University Library of Munich, Germany.
  8. Singh, A., 1997. "Liberalisation, the Stock Market and the Market for Corporate Control: A Bridge Too Far for the Indian Economy?," Accounting and Finance Discussion Papers 97-af35, Faculty of Economics, University of Cambridge.
  9. 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.
  10. Singh, Ajit, 2003. "Corporate governance, corporate finance and stock markets in emerging countries," MPRA Paper 24302, University Library of Munich, Germany.
  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. 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.
  13. Petia Topalova, 2004. "Overview of the Indian Corporate Sector: 1989-2002," IMF Working Papers 04/64, International Monetary Fund.
  14. 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.

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