Financial Structure in Chile: Macroeconomic Developments and Microeconomic Effects

The objectives of this paper are, first, to describe the developments in Chilean financial markets at the macroeconomic level and, then, to examine their effects at the level of firms. After reviewing the main government policies towards financial markets in the last three decades, the paper describes the remarkable changes and progress in the banking sector and in various types of capital markets (bond, stock, pension and insurance markets) during the same period. This is done by evaluating changes in financial markets size, activity, and efficiency. Second, the paper analyzes the changes in both the access to financial markets and the financing (balance-sheet) decisions in a sample of Chilean firms. The sample consists of 79 firms that are quoted in the stock market and for which annual balance sheet data for the period 1985-1995 are available and complete. The paper estimates and tests econometrically three issues. The first is whether the firms' reliance on internal funds for investment has decreased in the more financially open period of the 1990s relative to the 1980s and, thus, whether investment has been more responsive to changes in the q-value of the firm. The second examines whether financial liberalization and the development of the banking, stock and bond markets at the aggregate level have affected the importance of debt relative to equity and the maturity of debt in the balance sheet of firms. The third studies the extent to which firm-specific and aggregate financial market developments have impacted on firm growth, measured by the percentage increase in operational revenues. In general, we conclude that financial developments at the macro level have indeed had an impact on the firms' access to capital markets, their financial structure, and their rate of growth.