Do Public Equity Markets Matter in Emerging Economies? Evidence from India

Todd A. Gormley, Radhakrishnan Gopalan
2012 Social Science Research Network  
Are public equity markets important for a firm's investments and growth in emerging economies? We answer this question by analyzing the collapse of India's equity market in 1997, which adversely affected firms' access to equity finance. Using a rich dataset of both public and private firms spanning 1992-2002, we find that the equity market in India funded the growth and investments of small, young, and non-group firms prior to 1997. Following the market's collapse, private and public firms more
more » ... d public firms more likely to depend on external equity capitalnon-group firms, newly public firms, and firms resembling those issuing equity prior to 1997 -exhibit higher bankruptcy rates and lower growth, investment, and profitability relative to their public and private counterparts. The post-collapse decline in growth is greater among firms with more external finance needs and less tangible assets. Overall, the evidence suggests that the public equity markets are an important source of finance in emerging economies and are not easily replaced by alternate sources of finance. JEL Classification Numbers: G01, G20, O16, E44.
doi:10.2139/ssrn.1010116 fatcat:thcd6kqc6jftdin6bf2ik7cm3e