stock market, which reduces the asymmetries of information, hence increasing the supply of long-term debt.

Our results are however not robust to the inclusion of unobserved fixed effects at the industry level in each country. In Table 5b, we perform the same regressions by using the variable CSFAMKT.<sup>75</sup> The results suggests the previous variable CSFAGDP indeed introduces a spurious correlation (as discussed before) between the level of development of contractual savings and leverage. Now, leverage is positively correlated with the level of development of contractual savings. However, as suggested by the regressions on LTDTE and LTDTD, the mechanism seems to go through an increase in long-term debt relative to equity and long term debt relative to short-term debt.

Overall, these two sets of regressions tend to support the hypothesis of a global impact of contractual savings development on leverage. Moreover, the development contractual savings institutions seems to foster the use of long-term debt.

The absence of a strongly robust effect on the whole sample should not be totally surprising given that contractual savings institutions, as we showed in the previous paragraph, have extremely different investment behaviors from one country to another. We should expect a fall in leverage when contractual savings develop only if the cost of equity finance falls, which happens if the aggregate supply of equity increases (or for other reasons listed in Section 4). How contractual savings institutions invest their resources should have a crucial impact. The next result confirms this hypothesis.

In Table 6, we look at the impact of contractual savings portfolio choices on corporate financial decisions. We obtain a strong and economically significant effect on leverage. An increase in the proportion of financial assets invested in shares is associated with a decrease in corporate leverage. It leads also to a decrease in short-term debt relative to equity. This is robust to unobserved industries fixed effects. This set of results is consistent with the claim that the investment behavior of contractual savings institutions matters for corporate financing patterns. Their investment decisions have a significant impact on firms’ capital structure. This last result strongly suggests that (1) any attempt to understand cross and within country variations in corporate financing patterns needs to assess the role of non-bank financial intermediaries such as institutional investors. (2) Policy interventions that remove binding constraints on portfolios will have sizeable effects on the corporate sector financing patterns.<sup>76</sup> The coefficients of the pooled and within estimates imply that if Korean contractual savings institutions had had the same investment behavior as in South Africa (where contractual savings are investing 44% of their financial assets in shares on average over the period, compared to 12% in Korea), the debt equity ratio of Korean firms would have decreased from 4.9 to 4.6 in the pessimistic case, or to 3.9 in the optimistic case, hence a decrease between 6% and 20%.

> 75 We ran the regressions with CSSHCAP, with very similar results (not reported here).

> 76 Investment limits are binding in Latin America (Srinivas et al. (1999)), in Singapore, and in Korea  for instance.

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