ed States Japan




United Kingdom


□ Internal Financing


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.

Figure 7.5: Bonds versus Bank Loans -1990-96

United States Japan Germany

Source: Hackethal and Schmidt (1999)

There is also some evidence that firms in some emerging markets, such as Brazil and India, use equity (internal and equity) much more than debt to finance their operations. Some of this dependence can be attributed to government regulation that discourages the use of debt, either directly by requiring the debt ratios of firms to be below specified limits or indirectly by limiting the deductibility of interest expenses for tax purposes. One of the explanations for the greater dependence of U.S. corporations on debt issues relies on where they are in their growth life cycle. Firms in the United States, in contrast to firms in emerging markets, are much more likely to be in the mature growth stage of the life cycle. Consequently, firms in the US should be less dependent upon external equity. Another factor is that firms in the United States have far more access to corporate bond markets than do firms in other markets. Firms in Europe, for instance, often have to raise new debt from banks, rather than bond markets. This may constrain them in the use of new debt.

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