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Financial Development and Financing Constraints in a Developing Country: The Case of Bangladesh

Author

Listed:
  • LEE, KANG-KOOK

    (Ritsumeikan University)

  • ISLAM, MD. RABIUL

    (Monash University)

Abstract

This paper examines the sensitivity of investment to available cash-stock, a measure for internal funds, for 192 listed non-financial firms of Bangladesh from 1992 to 2002. The empirical results show that smaller firms have greater investment financing constraints than larger firms due to financial market imperfection and unequal access to external finance. We also find that investment financing constraints of small firms are eased along with financial development. It is likely that financial development improves efficiency of the financial market in Bangladesh, and hence decreases cash stock sensitivity of investment for small firms. Our findings demonstrate the importance of financial development for economic growth even in a developing country like Bangladesh.

Suggested Citation

  • Lee, Kang-Kook & Islam, Md. Rabiul, 2011. "Financial Development and Financing Constraints in a Developing Country: The Case of Bangladesh," Indian Economic Review, Department of Economics, Delhi School of Economics, vol. 46(1), pages 41-67.
    • Handle: RePEc:dse:indecr:0030
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    More about this item

    Keywords

    Financing constraints; Financial development; Investment; Bangladesh;
    All these keywords.

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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