This paper estimates both Panel Data and Time Series models for empirically identifying the determinants of external equity finance of the corporate sector in India. An analysis has also been carried out to gauge the impact of liberalization on the determinants of external equity finance. The paper finds that total long-term borrowings, size of the firm, profitability, growth rate of the firm, and liquidity are the major determinants of the external equity financing of Indian firms. From time series analysis it finds that the factors affecting equity financing clearly depend upon the type of ownership of companies.

According to the Pecking-Order Hypothesis, as far as risk is concerned, after external debt capital, external equity capital is an important source of finance of the private corporate sector in any economy. This external equity capital is raised through the stock market, which can finance the risky, productive borrowers, for whom asymmetric information is acute and in the recent period, stock market development has been the subject of intensive theoretical and empirical studies (Demirguc-Kunt and Levine 1995, and Levine and Zervos 1993, 1995). As shown by Levine (1991) and Bencivenga, Smith, and Starr (1996) stock markets affect economic activity through the creation of liquidity. Risk diversification through stock markets is another vehicle through which stock markets can affect economic growth (Obstfeld, 1994).

The external equity capital raised through the stock market is basically long-term in nature. Stock markets of the countries can supply equity capital through various forms such as initial public offerings, venture capital, etc. The first public offering of equity shares of a company, which is followed by a listing of its shares on the stock market, is called Initial Public Offering (IPO), and it is a major source of the equity capital financing of the private corporate sector. In this regard Pagano and Panetta (1998) have found that the likelihood of an IPO is determined by the company’s size, and the industry’s market-to-book ratio. Sabine (2002) has argued that the going public decision or raising the external equity capital is determined by financing needs, the market mood per industry, profitability, and size of the company.