<<

. 4
( 14 .)



>>



30%



20%



10%



0%
75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91


2

93

94

95

96

97


8

99

00

01
9




9
19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

20

20




Year

Internal Financing External Financing from Common and Preferred Stock External Financing from Debt




Source: Compustat
In every year, firms have relied more heavily on internal financing to meet capital needs
than on external financing. Furthermore, when external financing is used, it is more likely
to be new debt rather than new equity or preferred stock.




22
23

There are wide differences across firms in the United States in how much and
what type of external financing they use. The evidence is largely consistent with the
conclusions that emerge from looking at a firm™s place in the growth cycle in Figure 7.2.
Fluck, Holtz-Eakin and Rosen (1998) looked at several thousand firms that were
incorporated in Wisconsin2; most of these firms were small, private businesses. The
authors find that these firms depend almost entirely on internal financing, owner™s equity
and bank debt to cover their capital needs. The proportion of funds provided by internal
financing increases as the firms became older and more established. A small proportion
of private businesses manage to raise capital from venture capitalists and private equity
investors. Many of these firms plan on ultimately going public, and the returns to the
private equity investors come at the time of the public offering. Bradford and Smith
(1997) looked at 60 computer-related firms prior to their initial public offerings and noted
that 41 of these firms had private equity infusions before the public offering. The median
number of private equity investors in these firms was between two and three, and the
median proportion of the firm owned by these investors was 43.8%; an average of 3.2
years elapsed between the private equity investment and the initial public offering at
these firms. While this is a small sample of firms in one sector, it does suggest that
private equity plays a substantial role in allowing firms to bridge the gap between private
businesses and publicly traded firms.
In comparing the financing patterns of U.S. companies to companies in other
countries, we find some evidence that U.S. companies are much more heavily dependent
upon debt than equity for external financing than their counterparts in other countries.
Figure 7.4 summarizes new security issues3 in the G-7 countries4 between 1984 to 1991“




2 This is a unique data set, since this information is usually either not collected or not available to
researchers.
3 This is based upon OECD data, summarized in the OECD publication “ Financial Statements of Non-
Financial Enterprises”. This data is excerpted from Rajan and Zingales (1995).
4 The G-7 countries represent seven of the largest economies in the world. The leaders of these countries
meet every year to discuss economic policy.

23
24

Figure 7.4: Financing Patterns for G-7 Countries “ 1984-91

100%




80%




60%

Net Equity
Financing Mix




Net Debt
40% Internal Financing




20%




0%
United States Japan Germany France Italy United Canada
Kingdom

-20%
Country



Source: OECD
Net equity, in this graph, refers to the difference between new equity issues and stock
buybacks. Firms in the United States, during the period of this comparison, bought back
more stock than they issued, leading to negative net equity. In addition, a comparison of
financing patterns in the United States, Germany and Japan reveals that German and
Japanese firms are much more dependent upon bank debt than firms in the United States,
which are much likely to issue bonds.5 Figure 7.5 provides a comparison of bank loans
and bonds as sources of debt for firms in the three countries, as reported in Hackethal and
Schmidt (1999).




5 Hackethal and Schmidt (1999) compare financing patterns in the three countries.

24
25

Figure 7.5: Bonds versus Bank Loans - 1990-96

180%




160%




140%




120%
% of Physical Investment




100%

<<

. 4
( 14 .)



>>