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Sergio Schmukler is an economist at the World Bank. We are grateful to Stijn Claessens, Asli Demirgüç-Kunt, Vihang Errunza, Ricardo Ffrench Davis, Leonardo Hernandez, Patrick Honohan, Daniel Lederman, Ross Levine, Ragu Rajan, and Luis Serven for useful comments. We have benefited from feedback received at the World Bank conference “Financial Structure and Economic Development,” the LACEA Meetings in Rio de Janeiro, and the Winter Camp on International Finance in Santiago de Chile. We thank Simon A. Monti, Thorsten Beck, Simeon Djankov, Dori Flanagan, Jack Glen, Himmat Kalsi, Ashoka Mody, and David Sekiguchi for help with the data. We are grateful to Rina Bonficld, Fcdcrico Guerrero, Cicilia Harun, Emir Keye, J. Tong, and Chris van Klaveren for excellent research assistance.
By financial globalization we mean the integration of domestic financial systems with international financial markets.
The ideal variable to measure retained earnings would be retained earnings/total investment. However, the lack of firms’ detailed flow statements does not allow us to use it.
These variables have been identified by the literature on corporate finance as important determinants of agency costs that influence firms’ financing choices (see, for example, Booth, Aivazian, Demirgüç-Kunt, and Maksimovic 2001).
The capacity to generate revenues in foreign currency is viewed as one of the most important factors to obtain international collateral and, therefore, gain access to external financing.
The year 1998 also captures the Russian crisis, which many regard as part of the Asian crisis.
We define this variable differently than the variable capturing access to international bond markets because some firms trade their equity in international markets without raising new capital. This can take place through issuance of depositary receipts in international markets using equity outstanding in domestic markets. As an alternative approach to measure access to international equity markets, we also used the ratio of value traded in depositary receipts to the value traded in domestic markets. The results do not change significantly when using this alternative variable.
In fact, we also estimate a logistic transformation of the variable short-term debt over total debt as another alternative, because the variable is bounded between 0 and 1. The results are very similar. Therefore, we report the results without the transformation to make our results comparable with the existing literature.
Note that data on retained earnings for Mexican firms are not available.
As a caveat, consider that these estimates only cover non-financial firms and that financial liberalization took place in the early 1990s. Debt-equity ratios could have increased during the mid 1990s and mostly in financial firms.