Financing Patterns: Measurement Concepts and Empirical Results

Frankfurt Dept. of Finance Working Paper No. 125

49 Pages Posted: 1 Feb 2001

See all articles by Reinhard H. Schmidt

Reinhard H. Schmidt

Goethe University Frankfurt - Chair of Banking and Finance

Andreas Hackethal

Goethe University Frankfurt - Faculty of Economics and Business Administration; Goethe University Frankfurt - Research Center SAFE

Date Written: January 2004

Abstract

A widely recognized paper by Colin Mayer (1988) has led to a profound revision of academic thinking about financing patterns of corporations in different countries. Using flow-of-funds data instead of balance sheet data, Mayer and others who followed his lead found that internal financing is the dominant mode of financing in all countries, that financing patterns do not differ very much between countries and that those differences which still seem to exist are not at all consistent with the common conviction that financial systems can be classified as being either bank-based or capital market-based. This leads to a puzzle insofar as it calls into question the empirical foundation of the widely held belief that there is a correspondence between the financing patterns of corporations on the one side, and the structure of the financial sector and the prevailing corporate governance system in a given country on the other side.

The present paper addresses this puzzle on a methodological and an empirical basis. It starts by comparing and analyzing various ways of measuring financial structure and financing patterns and by demonstrating that the surprising empirical results found by studies that relied on net flows are due to a hidden assumption. It then derives an alternative method of measuring financing patterns, which also uses flow-of-funds data, but avoids the questionable assumption. This measurement concept is then applied to patterns of corporate financing in Germany, Japan and the United States. The empirical results, which use an estimation technique for determining gross flows of funds in those cases in which empirical data are not available, are very much in line with the commonly held belief prior to Mayer's influential contribution and indicate that the financial systems of the three countries do indeed differ from one another in a substantial way, and moreover in a way which is largely in line with the general view of the differences between the financial systems of the countries covered in the present paper.

Keywords: financing patterns, capital structure, financial system, banks, capital markets, internal finance, measurement concepts

JEL Classification: G20, G32

Suggested Citation

Schmidt, Reinhard H. and Hackethal, Andreas, Financing Patterns: Measurement Concepts and Empirical Results (January 2004). Frankfurt Dept. of Finance Working Paper. Available at SSRN: https://ssrn.com/abstract=254463 or http://dx.doi.org/10.2139/ssrn.254463

Reinhard H. Schmidt

Goethe University Frankfurt - Chair of Banking and Finance ( email )

Mertonstr. 17
P.O. Box 11932
60054 Frankfurt (Main)
Germany

Andreas Hackethal (Contact Author)

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno Platz 3
Frankfurt am Main, 60323
Germany

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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