Capital Structure, Rates of Return and Financing C

CapitalStructure,RatesofReturnandFinancingCorporateGrowth:ComparingDevelopedandEmergingMarkets,1994-00Draft:February3,2003JackGlenInternationalFinanceCorporationAjitSinghUniversityofCambridgeAbstract:Firmleveldatafromfinancialstatementsfornearly8,000listedcompaniesin22emergingand22developedcountriesovertheperiod1994-00areexamined.Capitalstructure,assetstructure,ratesofreturnandfinancingpatternsarecomparedacrosscountriesandovertime.Generally,thereareasmanysimilaritiesasdifferencesbetweenthetwogroups.Thedifferencesincludelowerlevelsofdebttofinanceassetsandlowerlevelsofcurrentassetsinemergingmarketscomparedwithdevelopedcountries.Returnsonassets,expressedinlocalcurrency,arecomparableinthetwogroupsbutappearmorevolatileinemergingmarkets.2CapitalStructure,RatesofReturnandFinancingCorporateGrowth:ComparingDevelopedandEmergingMarkets,1994-00I.IntroductionThemainpurposeofthispaperistoinvestigate,tohelptoestablishstylizedfactsand,wherepossible,toexplaindifferencesbetweenemergingmarket(EM)corporationsanddevelopedmarket(DM)corporationswithrespecttoaccountingratios,derivedfrombalancesheetsandincomestatementsforindividualcorporations.Inadditiontotheaccountingvariablessuchasthestructureofcorporateliabilities(short-termandlong-term),weexaminethesizedistributionofcorporations,theircapitalstructuresaswellasthefinancingofcorporategrowthinthetwogroupsofcountries.Astudyofthesevariablesfordevelopingcountriesisinterestinginitsownright,butinordertoputthisintoprospective,acomparisonwithadvancedcountriesisparticularlyvaluable.ThecurrentpublicinterestincorporatefinanceandcorporatebehaviorinemergingmarketsisarecentphenomenonthataroseoutoftheEastAsiancrisisandtheviewthatthe‘deepercauses’ofthecrisislayintheAsianwayofdoingbusiness1.Thatanalysissuggestedthatpoorcorporategovernance,inadequatecompetition,highleverageandcronycapitalismledtodisregardforprofits,over-investmentandexploitationofminorityshareholders.Hence,inordertoforestallfuturecrises,G-7countriesundertheNewInternationalFinancialArchitecture,haveproposed,reformofthecorporatesysteminemergingmarkets.2Whetherornotthisthesisiscorrect,corporatereforminemergingmarketsisnowonthenationalandinternationalagenda.Implementingappropriatereforms,however,requiresabodyofempiricalknowledgethatisonlynowbeginningtoemerge.Thispaperattemptstofurtherthatknowledge.Ourcontributioninthispaperreliesinreportingontheresultsofanalysisofcorporatefinancialstatementsofnearly8,000companiesin44countriesovertheperiod1995-00.Althoughwehavealargebodyofdata,itisimportanttorecognizethatthesampleisnotarandomselectionfromeachofthecountriesinvolvedandthat,therefore,interpretationofanyresultsmustincorporatethenatureofthesampleandanyinfluencethatitsselectionmighthaveontheresults.Forthatreason,wealsodrawonwhatisknownaboutthecountriesandthesectoralcompositionofthesamplewhendescribingourfindings.Atonelevel,thequestionsaddressedinthispaperaresimple.Forexample,howdoesatypicalcompanyinanemergingmarketfinancegrowth,frominternalorexternalsources?Arefirmsinemergingmarketslargerorsmallerthantheirdevelopedmarketcounterparts?Areassetandcapitalstructuresinemergingmarketsfundamentallydifferentfromthoseobservedindevelopedmarkets?However,interpretationoftheempiricalanswerstothesequestionsisfarfrombeingstraightforwardowing,inpart,tothesampleissuesraisedabove,aswellastheambiguitiesthatexistintherelevanttheoreticalmodels.1See,forexample,Pomerleano(1999),Greenspan(1998)andSummers(1998).ForcriticalviewsofthishypothesisseeSingh(2000)andStiglitz(2000).2ForfullerdiscussionoftheseissuesseeSingh,SinghandWeiss(2002).3Theremainderofthepaperisorganizedasfollows:thenextsectionoutlinesaseriesofanalyticalissuesthatoneneedstoconsiderwhencomparingcorporatefinancialchoicesandoutcomesinaninternationalcontext.Thatisfollowedbyadatadescriptionandtheempiricalresults.Asummary,conclusionsandpolicyimplicationscomprisethefinalsection.II.ComparingEMandDMCorporations:ConceptualIssuesShouldstatisticsgeneratedfromfinancialstatementsabout,forexample,capitalstructureandprofitability,systematicallydifferacrosscountries?Whatdoeseconomictheorypredict?Atoneleveltheorysuggeststhatdifferencesshouldbeimmaterialifallcountriesaresubjecttothefullrigorsofcompetitionandmarketforces.Theory,however,recognizesthat,despitevigorousmarketforces,theremaybespecificfactorsthatresultindifferences.Forexample,thesectoralcompositionoffirmsmightdifferacrosscountriesand,owingtorisksinherentinasector,thismightresultindifferentcorporatechoicesandoutcomes.Otherfactorsthatinfluencecorporateoutcomesarethemacro-economicenvironment,theregulatorysystem,thetaxsystem,institutions(e.g.thelegalsystemandgovernance)andthepreferencesofandoptionsavailabletoinvestors.Forthesereasonsoneshouldnotbesurprisedtofindinter-countrydifferencesincorporatefinanceandcorporatebehavior.Inlinewiththis,interpretationofobservedbehaviorthereforerequirescarefulattentiontothesefactors.Intheparticularcaseofcomparingemerginganddevelopedmarkets,whichisthefocusofthispaper,thereareimportantenvironmentaldifferencesthatarepertinenttotheanaly