Abstract:

The easy access of companies to the funding sources is an important indicator of the country’s financial development level. Companies often make investment and financing decisions depending on their internal funding capabilities. One of the main reasons for this is the asymmetrical information problem that occurs in the markets. Such market disadvantages cause a high difference between external financing costs and internal financing costs. The high level of financial development allows for the removal of market faults, reduces the costs of external funds, reduces their dependence on internal funds, and increases the possibility of investing.

The aim of this study is to determine whether the level of financial development affects the financial limits of companies. The study took advantage of the data from 1264 industrial enterprises that were traded on the securities exchanges in 20 different countries between 2009 and 2019. In the first phase of the two-step analysis, the countries were aggregated by taking into account the levels of financial development and the countries were divided into two groups. The sensitivity of the company’s investments to cash flows was later identified for each group. The findings show that as the level of development of financial markets increases, the dependence on internal funds in companies’ investments will decrease.

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