One of the most notable developments in the world economy over the past 20 years has been the rise of the People’s Republic of China (PRC) and India as global economic powers, accompanied by high overall growth and an increase in their financial activity. But how much have the PRC and Indian firms used and benefitted from the expansion in capital markets to obtain financing and grow?
In a new paper (Didier and Schmukler, 2013), we study this question by assembling a unique and comprehensive data set on domestic and international capital raising activity and performance of publicly listed Chinese and Indian firms. We compile transaction-level information on equity and bond issues. We then match these data with annual firm-level balance sheet information. Our matched data comprise 2,458 firms in the PRC and 4,305 firms in India.
The expansion of financing by private-sector firms in the PRC and India has been much more subdued than the aggregate numbers of financial depth suggest. Although capital raising activity in equity and bond markets expanded substantially in 2005–2010, it remained small as a percentage of GDP. Importantly, such expansion has not been associated with a widespread use of capital markets by firms. For example, the amount of capital raisings through equity issues in domestic markets doubled in the PRC (from 0.5% to 1% of GDP per year) between 2000–2004 and 2005–2010, whereas the number of firms using these markets to raise capital per year increased only 20% (from 87 to 105 out of 1,621 listed firms) over the same period. On a smaller scale, similar patterns apply to the use of foreign markets. Also, not only have few firms used equity and bond markets on a recurrent basis, but even fewer firms captured the bulk of the capital market financing. For instance, the top 10 firms in the PRC and India captured from 43% to 62% of the total amount raised in 2005–2010. Therefore, this suggests that capital markets have not been a significant source of financing for firms, which contrasts with the perception in the literature that equity markets, particularly in India, are well developed.
Moreover, firms that use equity or bond markets are very different and behave differently from those that do not use capital markets. While non-issuing firms in the PRC and India grew at about the same rate as the overall economy, issuing firms grew twice as fast in 2004–2011. Firms that raise capital are typically larger initially and become even larger than non-issuing firms after raising capital through equity or bonds. Firms grow faster the year before and the year in which they raise capital. Moreover, firms that use capital markets have ex-ante a longer liability maturity structure and more capital expenditures, and the differences relative to the firms that do not use capital markets become more accentuated ex-post. Notably, all these differences between users and non-users are associated with the probability of raising capital. Furthermore, the evidence on firm size and growth has important implications for the firm size distribution of listed firms. Quantile regressions show that the distribution of issuing firms is tilted to the right and shifts more over time than the distribution of those that do not issue, suggesting no convergence in firm size; if anything, the distributions seem to diverge.
Our findings suggest that finance matters. Even though the financial markets in the PRC and India are arguably not fully developed yet, the firms that are able to raise capital do seem to benefit from it, particularly in terms of their overall expansion. In other words, at least part of the high growth in these countries seems to come from the firms that are able to raise new funds. Moreover, even large firms appear to be partly financially constrained. The differentiated performance between users and non-users of capital market financing suggests that, for the group of public listed firms that issue securities, their performance is sensitive to the external capital raised. The fact that firms perform differently and expand when they raise capital also implies that they had investment opportunities ex-ante that they could not realize. While capital raising activity is related to changes in firm dynamics, we did not analyze to what extent the effects are driven by the supply side (the capital market side) or the demand side (the firm side). Doing so requires further research.
During the past decades, many emerging economies have undertaken great efforts to expand the scope and depth of their capital markets and to liberalize their financial sectors as a way to complete and increase the provision of financial services. However, expanding capital markets might tend to directly benefit the largest firms that are able to reach some minimum threshold size for issuance. More widespread direct and indirect effects are more difficult to find.
Didier, T., and S. Schmukler. 2013. The financing and growth of firms in China and India: evidence from capital markets. World Bank Policy Research Working Paper 6401. Forthcoming, Journal of International Money and Finance. Summary available at VoxEU.org. May 6.