We test the pecking order theory of corporate leverage on a broad cross-section of publicly traded American firms for 1971 to 1998. Contrary to the pecking order theory, net equity issues trackthe financing deficit more closely than do net debt issues. While large firms exhibit some aspects of pecking order behavior, the evidence is not robust to the inclusion of conventional leverage factors, nor to the analysis of evidence from the 1990s. Financing deficit is less important in explaining net debt issues over time for firms of all sizes.

We thank Nick Bloom and Steve Bond for providing the data used in the paper and seminar participants at the Bank of England, Bank of Spain and Royal Economic Society Annual Conference (Warwick) for comments. The usual disclaimer applies. The views expressed in this paper are those of the authors and should not be thought to represent those of the Bank of England or Bank of Spain. Copies of working papers may be obtained from Publications Group, Bank of England,

Abstract: Firm level data from financial statements for nearly 8,000 listed companies in 22 emerging and 22 developed countries over the period 1994-00 are examined. Capital structure, asset structure, rates of return and financing patterns are compared across countries and over time. In emerging markets (EM) the ratio of debt to total assets and the ratio of current assets to total assets is lower than in developed markets (DM). EM companies employ higher levels of fixed assets (relative to total assets) than do DM companies. Returns on assets, after adjusting for local inflation, are statistically and economically less in EM than in DM countries, especially in the early years of the sample. Country effects are more important than sector effects in explaining cross-firm variation in the variables, but individual firm effects account for most of the variation. Capital Structure, Rates of Return and Financing Corporate Growth: Comparing Developed and Emerging Markets, 1994-00 I.

In 2009 all ECB publications feature a motif taken from the €200 banknote. © European Central Bank, 2009 Address

This paper focuses on the inter-relationship between corporate governance, financing of corporate growth and stock market development in emerging countries. It explores both theoretically and empirically the nature of the interrelationships between these phenomena, as well as their implications for economic policy. It concentrates on how corporate growth is financed, an area where the literature has identified important anomalies in relation to corporate behaviour and governance. The paper provides new information and analysis on this subject for the 1990s which it is shown leads to further anomalies from the perspective of extant economic theory. It also comments briefly on the recent research on the legal system, corporate laws, corporate governance and corporate performance. In considering the latter issues the paper examines more closely the evolution of the financing of corporate growth and of stock market development in the specific case of the Indian economy in the 1980s

Firm level data from financial statements for nearly 8,000 listed companies in 22 emerging and 22 developed countries over the period 1994-00 are examined. Capital structure, asset structure, rates of return and financing patterns are compared across countries and over time. Generally, there are as many similarities as differences between the two groups. The differences include lower levels of debt to finance assets and lower levels of current assets in emerging markets compared with developed countries. Returns on assets, expressed in local currency, are comparable in the two groups but appear more volatile in emerging markets.

The paper introduces the three articles in this Policy Feature, concerned respectively with competition, corporate governance and selection in emerging markets. Apart from being important in their own right, it is shown how these topics have recently acquired urgent domestic and international policy significance. This overview also provides the intellectual background to the issues raised in the papers and examines their interrelationships in analytical, empirical and methodological terms. It outlines a research programme which would not only have direct policy relevance for both emerging and mature countries, but would also have broader analytical significance for many areas of economic theory.

This paper provides a theory of debt and hedging based on human capital. We distinguish human capital from physical capital in two ways: (1) human capital is inalienable and can exercise a one-sided option to leave the firm, and (2) human capital is not perfectly replaceable. We show that a firm may reach the first best solution while issuing debt or equity to outsiders provided that either the insiders receive a senior claim or that the firm hedges. We then show that given asymmetric information concerning costs the only viable solution has the firm issuing debt to outsiders and hedging. The views expressed here are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Atlanta or the Board of Governors of the Federal Reserve System. We wish to thank participants at the Risk Management and Insurance seminar at Georgia State University for valuable comments. Any errors are those of the authors. DEBT, HEDGING AND HUMAN CAPITAL I.

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The value of debt tax shields in foundational valuation models by Nobel Laureates Modigliani and Miller (MM) continues to be a controversial issue that is central to our understanding of corporate finance. This paper contributes to this pivotal debate by proposing that the appropriate discount rate to value interest tax deductions available to levered shareholders is the levered cost of equity, rather than riskless and risky costs of debt or the unlevered cost of equity in previous studies. Assuming no bankruptcy risk and no personal taxes, the proposed revised tax model yields the following results that are more consistent with MM’s original tax model than their later corrected tax model. Implications to corporate capital structure decisions and previous literature are discussed. Also, analyses are extended to Miller’s personal tax extension of the MM model.