The rise of domestic capital markets for corporate financing: Lessons from East Asia

Abstract

Firms from emerging economies have significantly increased the amount of bond financing, particularly after the Global Financial Crisis and when compared to other financing instruments. The literature links this growth to a rise in international bond issuances as the supply of capital by foreign investors expanded. This paper explores the role of domestic markets by comparing domestic and international bond issuances by East Asian firms, which are the most active bond issuers in emerging economies. The paper shows that an expansion in domestic bond issuances, in domestic currency, by more and smaller firms was the main component behind the overall growth in bond financing. This expansion was accompanied by a decline in bond yields, higher firm leverage, and higher cash accumulation following issuances after 2008. The evidence is consistent with a higher supply of funds by domestic investors being an important driver behind the rise in domestic bond financing.