Executive Summary
Ever since Stewart Myers’s (1977) article on ‘The Determinants of Corporate Borrowing’, the corporate finance literature on studies examining the nature and determinants of corporate financial structure has grown steadily. Empirical research on the said issue however has been
largely confined to the developed economies and received scant attention in developing nations primarily because of the typical third world market imperfections, viz; the problem of financial repression induced by administered interest rates pegged at unrealistically low levels; large scale pre-emption of resources from the banking system by the government to
finance its fiscal deficit; excessive structural and micro regulation that inhibited financial innovation and increased transaction costs; relatively inadequate level of prudential regulation in the financial sector; poorly developed debt and money markets; and outdated (often primitive) technological and institutional structures that made the capital markets
and the rest of the financial system highly inefficient. However since the mid 1980s and early 1990s, the institutional setup under which firms in these countries operated underwent substantial transformation. To quote Bhaduri (2000: p 656) ‘The move towards the free market, coupled with the widening and deepening of various financial markets, including the
capital market, has provided the scope for the corporate sectors to optimally determine their capital structure. Such an environment has also encouraged more meaningful research on the capital structure issue.’ Consequently, the later part of the 1990s and early 2000 witnessed
several attempts to highlight the issue of capital structure choice in developing countries.
This article attemp ...