Net Equity and Corporate Financing in Europe: A Comparative Analysis of German, Austrian, Spanish, French and Italian Manufacturing Companies with Share Capital During the Period 1991-1993

Abstract

Throughout the Member States of the European Union, economic policy debate has centered on the terms of corporate financing, and in particular on whether the companies of each country have sufficient equity to compete in a single market. Moreover, faced with the risk of corporate insolvency, credit institutions consider a certain equity level to be one of several indicators of creditworthiness. Given this situation and within the framework of the work of the European Committee of Central Balance Sheet Offices, Germany, Austria, Spain, France and Italy and the second General Directorate of the European Commission invited a working group to compare the financial autonomy of European industrial companies. This study covered the period 1991 to 1993 and examined several issues. Do corporate equity levels vary according to the country? Do these levels vary according to company size, regardless of the country? Do small companies have a specific position in each country? This study is based on an evaluation of corporate solvency, given that equity is used by companies and their financial partners to control risk exposure. After a brief reminder of the role of equity, the study sums up the research conducted since the publication in 1958 of the paper by Modigliani and Miller and gives a critical analysis of the empirical findings of international comparisons. All such research must begin by identifying and solving the financial and statistical methodological problems inherent to comparisons of the financing conditions of different countries. The work conducted gives rise to clear conclusions.

More specifically, in terms of the weighted mean, net equity levels are fairly similar in Austria, Spain, France and Germany, and only Italy appears to be under-capitalized. The median, however, divides the countries into two groups, with France and Spain showing high net equity/financial resources ratios, and Italy and Germany low ratios. Analysis of the situation of Austrian companies is far from straightforward on account of the under-representation of small companies, which overvalues the median in view of the under-capitalization of this group of companies.

- Corporate equity levels vary from country to country. These differences are at least partially related to variations in taxation, bankruptcy regulations, the organization of the banking system, the relationship between banks and companies and the financing practices of each country.

- An overall analysis is insufficient and must be complemented by an analysis by company size.

- The situation of the companies in each country can not be evaluated without taking into account financial requirements.

- In France, regardless of the size of the company, the share of equity in overall financial resources appears larger than in other countries. Moreover, the difference between the equity of small and medium-sized companies and that of large corporations is narrower than in Germany or Austria. It should also be noted that this company classification is relatively recent in France. In the early 1980s, small and medium-sized companies enjoyed a stronger financial position than large corporations. Subsequently, ebbing inflation, rising profits and expanding capital markets enabled large corporations to improve their financial structures significantly. At the beginning of the 1990s, all companies were affected by the economic downturn, with the notable exception of large French corporations, which continued to strengthen their financial structures. The low debt-to-net turnover ratio in France is due to high equity levels, as well as low borrowing requirements related to high asset turnover rates, which may be attributable to lower operating capital requirements and perhaps relatively weak fixed asset formation during the period under review.

In view of the conference on 10 October 1997 in Paris, the study group calculated the ratios for 1995. The results were consistent whith those of 1991-1993. On the whole, the country classification resulting from the different ratios was confirmed. There is nevertheless an overall improvement in the various indicators of autonomy and activity, in particular in Spain.

Note: This report was preparted by the European Committe of Central Balance Sheet Offices, Working Group on Net Equity.

Keywords: equity, corporate finance, insitution, europe

JEL Classification: G31, G32