Globalization and Firms' Financing Choices: Evidence From Emerging Economies

Abstract

This paper studies the relation between firm's financing choices and financial globalization. Using an East Asian and Latin American firm-level panel for the 1980s and 1990s, we study how leverage ratios, debt maturity structure, and sources of financing change when economies are liberalized and when firms access international capital markets. We find that debt-equity ratios do not increase after financial liberalization. Debt maturity shortens for the average firm when countries undertake financial liberalization.However, domestic firms that actually participate in international capital markets extend their debt maturity. Financial liberalization has less effects on firms from countries with more developed domestic financial systems. Leverage ratios increase during crises.

Change and Continuity in Southeast Asian Ethnic Chinese Business

“…Recent empirical studies in financial economics (Filatotchev et al, 2005;Mitton, 2002;Schmukler & Vesperoni, 2001), for instance, have identified significant positive relationships between improved corporate governance (e.g., establishing credible investor protection provisions and appointing Big Six auditors) and lower cost of capital and higher corporate performance among ethnic Chinese family firms. Klapper & Love (2002) have also found that good corporate governance mattered a lot more in countries with weak shareholder protection and poor judicial efficiency.…”

“…Klapper & Love (2002) have also found that good corporate governance mattered a lot more in countries with weak shareholder protection and poor judicial efficiency. Schmukler & Vesperoni (2001) have reported that firms from emerging economies could benefit from accessing international bond markets by securing long-term financing and extending their debt maturity structure. Raising capital in international financial markets, however, requires ethnic Chinese (family) firms to become increasingly Bcredible'' and Btransparent'' in their management practices and systems of financial control as defined by the gatekeepers of the global financial system (Ridding & Kynge, 1997).…”

The effects of capital controls on international capital flows in the presence of asymmetric information

“…This may provide further insight into the role of capital controls in lengthening the maturity structure of international capital flows and tilting the composition towards FDI. A final extension would be to consider the tradeoffs between domestic and foreign financing as well as the choice between debt and equity financing, providing theoretical underpinnings for recent empirical work examining both choices (e.g., Schmukler and Vesperoni, 2000;Domowitz et al, 2001). This would also provide a model with which to examine the consequences of capital controls for development of financial markets at the international and domestic levels and the possible impact on debt versus equity financing.…”

Capital Controls and the Cost of Debt

“…Capital account restrictions on inflows might affect the cost of firms' debt for several reasons. First, firms residing in a country with restrictions on capital inflows face a more restricted supply of international capital (Schmukler and Vesperoni, 2001). Second, when capital account restrictions on inflows are in place, firms incur additional costs when raising capital.…”