FINANCIAL SYSTEM & CORPORATE FINANCE
Over the past decade there has been increasing interest in the role of institutions in the financial and real activities of the corporate sector. That interest is most clearly reflected in the plethora of models on imperfect information that have recently appeared in the finance literature. Several attempts have been or are currently being made to establish the empirical significance of these models for the financial behavior of firms.
This volume reports the results of a number of such studies. However, a majority of this work is confined to one country, namely the United States, and examines only a small segment of a country's total financial system at any one time. It is therefore difficult to judge the broader significance of these models for the overall functioning of a financial system and to determine the extent to which they are relevant to different countries. It is well known that there are significant variations in the structure of different countries' financial systems.
Since Marshall there has been much discussion about the role of banks in the German financial system. Schumpeter, Gerschenkron, and Cameron all pointed to banks as an engine of growth of the German economy. More recently, similar consideration has been given to the role of banks in the Japanese economy and contrasts have been drawn Colin Mayer is professor of corporate finance at City University Business School in London and codirector of the Centre for Economic Policy Research's program in applied microeconomics.
This paper is part of the Centre for Economic Policy Research's "International Study of the Financing of Industry." The CEPR study is being financed by the Anglo-German Foundation, the Bank of England, the Commission of the European Communities, the Economic and Social Research Council, the Esmee-Fairbairn Charitable Trust, the Japan Foundation, and the Nuffield Foundation. This paper was presented at the NBER Conference, "Information, Capital Markets and Investment Conference," Boston, May 1989. The author is grateful to conference participants for their comments, and especially to Roger Farmer and Glenn Hubbard. Ian Alexander provided excellent research assistance. 307 308 Colin Mayer between the importance of banks and securities markets in Japanese and Anglo-Saxon financial systems, respectively.1 Prima facie, banking systems would be expected to avoid some of the information deficiencies associated with securities markets.
A primary rationale for the existence of banks is that they perform screening and monitoring functions that individual investors can only undertake at high cost. Resource allocation, credit availability, and terms of loans may all, therefore, be superior under a bank-based than a market financial system. On the other hand, transaction costs may be lower in the absence of intermediation, and taxation may militate in favor of market-based sources of capital. There are then several factors that finance theory suggests should influence the financing patterns of different countries' corporate sectors. The purpose of this paper is to compare the industry financing of eight developed countries and to evaluate these patterns in the context of alternative theories of corporate finance. International comparison of the financing of industry is a familiar subject.
However, it is probably fair to say that, to date, it has only shed limited light on the functioning of different financial systems. In large part this is due to the unreliability of the underlying data. There are, for example, well-known problems associated with international comparisons of corporate sector gearing: the valuation of assets, the treatment of reserves and goodwill, and the double counting of intrasector flows all present serious difficulties. The extent to which such inconsistencies can be overcome by ad hoc corrections is questionable. One justification for a reexamination of this subject at this time is that more reliable methods of comparison have been developed that overcome many of the problems that have afflicted previous studies.
Problems remain but the degree of comparability reported in this paper is almost certainly greater than that of previous studies and probably about as great as existing data allow the researcher to achieve at an aggregate level. The results suggest 10 stylized facts about corporate finance. These concern forms of finance in different countries and the relation between different forms of finance over time. The stylized observations are reported . In alternative theories of corporate finance are discussed, and their relevance to explaining the observed financing patterns is considered. This is not supposed to be a test of alternative theories, merely an examination of the extent to which they are consistent with aggregate financing patterns in different countries.
Theory and observation bear directly on many of the issues that have been central to policy debates about financial systems. In particular, there is currently much discussion about the relative merits of banks and markets for promoting economic growth. As noted above, banks have traditionally been regarded as central to the promotion of economic growth. More recently, disillusionment with the role of banks in developing countries has intensified in the face of widespread corruption and bank failures. The World Bank (1989) 309 Financial Systems, Corporate Finance, and Economic Development has, as a consequence, advocated the use of both securities markets and banks in promoting economic growth. Likewise, as the emergence of a unified market in 1992 promises to create a high degree of homogeneity across the financial systems of member states, the strengths and weaknesses of different financial systems have been brought to the fore of policy discussions. considers the implications of both empirical observations and theoretical models for the relative merits of securities markets and banks in promoting economic growth.
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