Abstract:

 We quantify the implications of expanded firm access to capital market financing for
 investment and misallocation at both the micro and macro levels. Using a novel panel
 that links bond and equity issuances to firm-level balance sheets in 100 countries,
 we show that most of the growth in financing since the 2000s has come from new
 participants—firms absent from capital markets in the 1990s. New participants are
 smaller, younger, and exhibit higher marginal revenue products of capital (MRPK),
 especially in low- and middle-income countries (LMICs). Following an issuance, these
 firms expand investment and experience a 15% decline in MRPK, consistent with a
 relaxation of financial constraints. Effects for incumbents are limited. Evidence from
 China’s staggered equity-market liberalization supports these findings. Aggregating
 firm-level responses, we estimate that expanded market access reduced misallocation
 in LMICs by 3.6%, with new participants accounting for most of the gain.