Financing in an emerging economy: Does financial development or financial structure matter? Fernanda Castro a , Aquiles E.G. Kalatzis b, ⁎, Carlos Martins-Filho c a Department of Production Engineering, School of Engineering of São Carlos, University of São Paulo, EESC—USP, Brazil b Department of Production Engineering, School of Engineering of São Carlos, University of São Paulo, EESC—USP, Av Trabalhador São-Carlense 400, São Carlos, SP 13566-590, Brazil c Department of Economics, University of Colorado at Boulder, Economics Building, Office Econ 105, 256 UCB, Boulder, CO 80309-0256, USA article info abstract Article history: Received 9 August 2014 Received in revised form 1 April 2015 Accepted 7 April 2015 Available online 17 April 2015 This paper investigates the effects of the financial system on a firm's investment decisions using data from 404 Brazilian firms over the 1998–2006 period. We also use country-level data and classify firms as financially constrained and unconstrained according to the KZ and WW indexes. The results show that financial development has a signif- icant impact on a firm's investment. Furthermore, the financial structure has an effect on the investment behavior of constrained firms even after controlling for the level of financial development. This finding points to a market-based financial system in order to reduce the constrained firms' dependence on internal resources. © 2015 Elsevier B.V. All rights reserved. JEL classification: G10 G20 G30 G31 O16 Keywords: Financial constraints Financial development Financial structure Investment decisions 1. Introduction Finance and growth theories have shown that financial functions provided by banks and capital markets play an important role to enhance economic activity. This suggests a strong relationship between the devel- opment of financial markets and the real economy (King and Levine, 1993; Levine et al., 2000; Loayza and Rancière, 2006; Rajan and Zingales, 1998). According to these theories financial development may be charac- terized as the ability of financial actors to provide mechanisms that facilitate and intensify economic Emerging Markets Review 23 (2015) 96–123 ⁎ Corresponding author. Tel.: +55 16 3373 8288. E-mail addresses: fernandacastro@usp.br (F. Castro), aquiles@sc.usp.br (A.E.G. Kalatzis), carlos.martins@colorado.edu (C. Martins-Filho) http://dx.doi.org/10.1016/j.ememar.2015.04.012 1566-0141 © 2015 Elsevier B.V. All rights reserved. Contents lists available at ScienceDirect Emerging Markets Review journal homepage: www.elsevier.com/locate/emr