STOCK-MARKET DEVELOPMENT AND FINANCING CHOICES OF FIRMS

In many developing countries with emerging stock markets, banks are fe arful of stock market development because they think that stock market s will reduce the volume of their business. This article empirically a nalyzes the effects of stock market development on firms' financing ch oices using data from thirty developing and industrial countries from 1980 to 1991. The results imply that initial improvements in the funct ioning of a developing stock market produce a higher debt-equity ratio for firms and thus more business for banks. In stock markets that are already developed, further development leads to a substitution of equ ity for debt financing. By contrast, in developing stock markets, larg e firms become more levered as the stock market develops, whereas smal l firms do not appear to be significantly affected by stock market dev elopment.