Firms from Financially Developed Economies Do Not Save Less

Contrary to evidence in Khurana et al. (2006), I find that firms from financially developed economies do not have systematically smaller propensities to save out of cash flow. This new result occurs for two interrelated reasons. First, cash flow uncertainty affects saving propensities at least as much as do external finance constraints. Second, although financial development eases external finance constraints, it also contributes to greater cash flow uncertainty through more innovation and higher asset intangibility. This cross-country result holds for financially constrained firms and those with greater cash flow uncertainty. The inverse relation between financial development and saving propensities can hold only for unconstrained firms and those with lower uncertainty. Liberalization of stock markets further bolsters the results.