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The stockmarket as a source of finance : a comparison of U.S. and Indian firms

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  • Samuel, Cherian
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    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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    Bibliographic Info

    Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1592.

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    Date of creation: 30 Apr 1996
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    Handle: RePEc:wbk:wbrwps:1592

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    Keywords: International Terrorism&Counterterrorism; Payment Systems&Infrastructure; Banks&Banking Reform; Financial Intermediation; Decentralization; Economic Theory&Research; Housing Finance; International Terrorism&Counterterrorism; Financial Intermediation; Banks&Banking Reform;

    References

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    1. Singh, Ajit, 1994. "Corporate financial patterns in industrialising economies: a comparative international study," MPRA Paper 54936, University Library of Munich, Germany.
    2. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    3. Oliner, Stephen D & Rudebusch, Glenn D, 1992. "Sources of the Financing Hierarchy for Business Investment," The Review of Economics and Statistics, MIT Press, vol. 74(4), pages 643-54, November.
    4. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    5. Samuel, Cherian, 1996. "Stock market and investment : the governance role of the market," Policy Research Working Paper Series 1578, The World Bank.
    6. Franklin Allen, . "Stock Markets and Resource Allocation (Reprint 036)," Rodney L. White Center for Financial Research Working Papers 15-92, Wharton School Rodney L. White Center for Financial Research.
    7. Singh, A. & Hamid, J., 1992. "Corporate Financial Structure in Developing Countries," Papers 1, World Bank - International Finance Corporation.
    8. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    9. Michael E. Porter, 1992. "Capital Choices: Changing The Way America Invests In Industry," Journal of Applied Corporate Finance, Morgan Stanley, vol. 5(2), pages 4-16.
    10. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    11. Samuel, Cherian, 1996. "Internal finance and investment : another look," Policy Research Working Paper Series 1663, The World Bank.
    12. Grabowski, Henry G & Mueller, Dennis C, 1972. "Managerial and Stockholder Welfare Models of Firm Expenditures," The Review of Economics and Statistics, MIT Press, vol. 54(1), pages 9-24, February.
    13. Lyon, Andrew, 1992. "Taxation, information asymmetries, and a firm's financing choices," Policy Research Working Paper Series 936, The World Bank.
    14. Grabowski, Henry G & Mueller, Dennis C, 1975. "Life-Cycle Effects on Corporate Returns on Retentions," The Review of Economics and Statistics, MIT Press, vol. 57(4), pages 400-409, November.
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    Cited by:
    1. David Cobham & Ramesh Subramaniam, 1995. "Corporate Finance in Developing Countries: New Evidence for India," CRIEFF Discussion Papers 9512, Centre for Research into Industry, Enterprise, Finance and the Firm.
    2. Richard Shearmur, 2001. "Financial Flows and Places: The Case of Monreal," Canadian Public Policy, University of Toronto Press, vol. 27(2), pages 219-233, June.
    3. Uma Kambhampati, 2006. "Financial liberalisation, corporate governance and the efficiency if firms in Indian manufacturing," Economics & Management Discussion Papers em-dp2006-33, Henley Business School, Reading University.

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