Financial market development and the importance of internal cash: Evidence from international data

We examine the impact of financial market development on the extent to which firms have to rely on internal capital for making investments. Using international data from 31 countries for the 1987–1997 period, we find evidence of a negative relationship between financial market development and the importance of internal capital. The evidence is consistent across different estimation procedures, alternative measures of financial constraints and cash flow, and the use of bootstrapped standard errors. Finally, we find that the distortionary effect of negative cash flow observations reported earlier for US data extends to international data as well.