Moreover, in the present context of financial instability, developing countries may find worthwhile to develop a domestic source of long-term financing.<sup>6</sup> Therefore, this study comes as a necessary complement to earlier works stressing the impact of financial and legal institutions on firms’ financing patterns in a crosscountry perspective.<sup>7</sup> In an asymmetric information world in which conflicts of interest between external investors and those who manage and control the productive assets, the financial institutions and the legal environment<sup>8</sup> will shape the capital structures<sup>9</sup> of firms, leading to systematic differences across countries. To the extent that contractual savings institutions modify the information set available to all investors, push for compliance with transparency rules and legal rights, or simply modify the relative supply of different securities, one should indeed expect to observe significant cross-country differences explained by contractual savings’ characteristics.

We address the following questions. First, as contractual savings institutions develop, is there a sizeable impact on firms’ leverage and debt maturity? Second, can such an impact be accounted for by the characteristics of firms in each country? Third, does this effect remain significant once we control for the activity of the banking sector, the size and activity of the stock market in each country, and unobserved fixed characteristics? Fourth, can we disentangle the potential channels through which contractual savings institutions affect firms’ capital structures? Finally, what do our results imply for the resilience of domestic financial systems in the highly volatile environment of the international financial architecture?

We show that the development of contractual savings institutions, as well as their portfolio decisions, have significant impacts on firms’ financing patterns, after controlling for firms’ characteristics and macroeconomic determinants. We identify different channels through which contractual savings affect the financing decisions of firms. In bank-based economies, the development of contractual savings is associated with an increase in firms’ leverage and maturity of debt. In market-based economies, instead, the asset allocation affects firms’ leverage: an increase in the proportion of shares in the portfolio of contractual savings is associated with a decrease in firms’ leverage. In a nutshell, the development and equity investments of contractual savings institutions are associated with an increase in the use of long-term finance. In the present context of highly volatile international capital movements, this can be a crucial role for domestic financial institutions. The policy implications of the paper are clear. If demographic, institutional and political preconditions are met for pension reforms<sup>10</sup> (or reform of the insurance industry), policy makers should pay particular attention to investment policies that enhance the contractual savings industry. The regulation, in particular for equity

> 6 Walker and Lefort (2000) argue that equity investments by fully privately managed pension systems have reduced price volatility in Argentina, Chile and Peru.

> 7 See Demirguc-Kunt and Maksimovic‘s papers.

> 8 Demirguc-Kunt and Maksimovic (1996, 1999), Demirguc-Kunt and Levine (1999) and La Porta et al. (1998).

> 9 See Shleifer and Vishny (1997) for a survey on corporate governance, La Porta et al.(1998) for the impact of the legal environment on external finance.

> 10 See for instance Vittas (2000).

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