Corporate Finance in Developing Countries: New Evidence for India

Financing of corporate growth has generally not been paid much attention in the development economics literature. Recent analysis of the Emerging Markets Data Base of the International Financial Corporation suggests that corporate financing patterns in India, among a select group of other developing countries, are different from those in developed countries. Based on the data for a sample of the largest firms, these analyses provide evidence that Indian firms make more use of equity financing than firms in developed countries. These results have been used to argue in favour of investing heavily in the development of stock markets in developing firms. In this paper, we investigate the possibility that such an analysis could be too sample-specific in that the largest firms do not represent all of the Indian private corporate sector. Our analysis, based on sectoral and cumulative firm-level data for India, suggests that while firms do make a significant use of equity issues, the nature of equity financing may be different in an environment in which a number of firms are not listed on stock exchanges but may be issuing equity. The results show that bank loans and internal finance are more important sources of corporate financing. Sectoral and firm-level data from the United Kingdom are utilized o compare the behaviour of Indian firms with that of firms in developed countries, for which there is a rich literature on financing corporate growth. We conclude that India is not obviously very different from the low internal finance developed countries and that, since a large part of equity issues are by unlisted firms, the gains from the promotion of stock markets may be limited.