Stock Market Development and Firm Financing Choices

Maksimovic, Vojislav
Washington, D. C.
World Bank Group
Date published: 
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Are banks and stock markets complements or substitutes? 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.
Demirgüç-Kunt and Maksimovic empirically analyze the association between firm financing choices and the level of development of financial markets in 30 countries for the period 1980- 91.
For the whole sample, there is a statistically significant negative correlation between stock market development, as measured by the ratio of market capitalization to gross domestic product, and the ratios of both long-term and short-term debt to firms' total equity.
For developed markets in the sample, further stock market development leads to a substitution of equity for debt financing.
In developing markets, by contrast, large firms become more leveraged as the stock market develops, whereas the smallest firms appear not to be significantly affected by market development.
This paper --- a product of the Finance and Private Sector Development Division, Policy Research Department --- is part of a larger effort in the department to study stock market development. The study was funded by the Bank's Research Support Budget under the research project Stock Market Development and Financial Intermediary Growth (RPO 678-37).

CITATION: Maksimovic, Vojislav. Stock Market Development and Firm Financing Choices . Washington, D. C. : World Bank Group , 1995. - Available at:

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