The Effect of Financial Market Development on Corporate Capital Structure: Dynamic Panel Evidence from African Economies
The Effect of Financial Market Development on Corporate Capital Structure: Dynamic Panel Evidence from African Economies

Summary/Abstract: Financial intermediaries, through their intermediation role in financial markets, play an important part in the financing choice of firms by reducing transaction costs and information asymmetries and providing liquidity to the financial system. To enhance the role played by banks and stock markets, some countries in Africa introduced a series of measures in their respective financial sectors. Consequently, this study examines how the banking sector and stock market development in selected African countries influenced the use of debt financing by non- financial firms. The study used a dynamic framework estimation technique on panel data of non- financial firms listed on the selected countries domestic stock exchange for the period 2003- 2012. The results revealed a significant reduction in the use of debt by the firms, following banking sector development while stock market development did not have any significant effect on debt usage. This suggests that developments in the banking sector instituted efficient risk pricing which raised the cost of finance, thereby, leading to a lower use of debt. In addition, the reduction in use of debt suggests the presence of high information asymmetries associated with use of long- term debt.

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