Capital Market Development and Firm Restructuring During an Economic Shock

We conceptualize capital markets in terms of resource access and governance, and argue that more developed capital markets facilitate firm restructuring through more effective provision of capital and governance of transactions. We then develop a contingency model that specifies that the effects of capital market development on restructuring vary by (1) types of restructuring, (2) the nature of the economic environments, and (3) firms’ access to resources. We evaluate a broad range of restructuring actions among independent firms and business group affiliates in Singapore and South Korea before and during the economic shock of 1998–1999. Results support our predictions of the impact of capital market development and of contingencies, and highlight the value of incorporating an external capital markets perspective to complement internally focused theoretical explanations for firm restructuring.