Financial Liberalization and Capital Structure Dynamics in Developing Countries: Evidence from Emerging Markets of South East Asia

Abstract

A careful review of previous empirical studies in developing countries reveals that these studies have focused on explaining relative use of debt, equity or internal finance using aggregate financial ratios (Mayer, 1988, 1989, and 1990; Glen and Pinto, 1994; IFC, 1991). These studies conceal rather explore considerable changes in firm's financing behaviour which has occurred because of financial reform in these countries (Green and Mutenheri, 2002) with some exceptions (Demirguc-Kunt and Maksimovic, 1996, 1997, and 1998). In addition, using standard empirical methods (Singh and Hameed, 1992; Rajan and Zingales, 1995) to reconcile determinants of leverage in developing countries and developed countries (Booth et al, 2001; Cobham and Subramaniam, 1998) studies have also missed capital market development factor in developing countries. Since 1980, firm level financing behaviour in developing countries has evolved in response to financial and economic reforms. Therefore, an essential next step in understanding corporate finance in developing countries is to examine how dynamics of capital structure have been influenced by financial reform programmes (Green and Mutenheri, 2002) and developing countries are ideal testing ground for this alternate argument of dynamic capital structure.

Keywords: Capital Structure, Financial Markets, Asia, Financial Reform

JEL Classification: G32, O16, O53, O23