In Figures 9 a-b we display the conditional correlation between leverage and respectively contractual savings size and asset allocation in a pooled regression at the country level. After controlling for firms’ characteristics, macroeconomic factors and bank and stock market size, a significant correlation remains between leverage and contractual savings size (Figure 9a). Contractual savings development has however a different impact on leverage in market-based or bank-based economies. In countries in which the stock market is the core of the financial system, the development of pension funds and insurance companies leads to a decrease in leverage. In bank-based financial systems the opposite effect seems to dominate: the development of contractual savings implies an increase in leverage. Figure 9b shows that the proportion of equity investments in the portfolio is negatively correlated to leverage in market-based financial systems whereas it seems to have no significant effect on leverage in bank-based economies.

Figure 11 plots the unexplained residuals of a pooled regression at the country level of debt maturity against contractual savings size. Again, the impact of contractual savings development is strikingly different in bank-based economies and in market-based economies. In the latter, the development of contractual savings institutions implies a decrease in debt maturity, whereas in the former it implies an increase in the debt maturity.

The industry level analysis (see Table 7) confirms the results obtained at the country level.<sup>78</sup> We report the coefficient on the contractual savings variable and its significance for each sub-group of countries. In market-based economies, there is a strongly significant impact of contractual savings portfolio choices on firms’ financing patterns: an increase in equity investments by contractual savings leads to a decline in leverage, for our three variables. The effect is robust to unobserved industry specific fixed effects within countries; and it is economically large. The impact of contractual savings development is somewhat weaker, although it affects leverage in a similar way. Debt maturity is also negatively correlated either to the level of development of contractual savings or the proportion of share investments in the portfolios of contractual savings. These results are consistent with the intuition. As contractual savings are large in these countries on average, it is likely that their marginal effect on firms’ financing patterns go through their investment choices rather than through an increase in their size.<sup>79</sup> As they increase their equity holdings, firms tend to substitute equity finance for debt finance. These results suggest that banks and institutional investors are indirect competitors. The fall in the maturity of debt may be partly attributed to the fact that banks concentrate on their core activity, which is short-term lending.

In the case of bank-based economies, the channels through which firms’ capital structures are affected are noticeably different. The dominant effect is the level of development of the contractual savings industry, while the asset allocation hardly affects

> 78 We ran the regression by moving Korea from the market-based subgroup to the bank-based one; results are essentially the same.

> 79 More precisely, it seems that the characteristics of contractual savings portfolio are more important than the size of share holdings relative to stock market capitalization. This result favors a corporate governance explanation.

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