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

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.