Stock market development and financing choices of firms

In many developing countries with emerging stock markets, banks are fearful of stock market development because they think that stock markets will reduce the volume of their business. This article empirically analyzes the effects of stock market development on firms' financing choices using data from thirty developing and industrial countries from 1980 to 1991. The results imply that initial improvements in the functioning 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 equity for debt financing. By contrast, in developing stock markets, large firms become more levered as the stock market develops, whereas small firms do not appear to be significantly affected by stock market development.