Financing in an emerging economy: Does financial development or financial structure matter?

This paper investigates the effects of the financial system on a firm's investment decisions using data from 404 Brazilian firms over the 1998-2006 period. We also use country-level data and classify firms as financially constrained and unconstrained according to the KZ and WW indexes. The results show that financial development has a significant impact on a firm's investment. Furthermore, the financial structure has an effect on the investment behavior of constrained firms even after controlling for the level of financial development. This finding points to a market-based financial system in order to reduce the constrained firms' dependence on internal resources.