Financing Patterns: Measurement Concepts and Empirical Results

A widely recognized paper by Colin Mayer (1988) has led to a profound revision of academicthinking about financing patterns of corporations in different countries. Using flow-of-funds datainstead of balance sheet data, Mayer and others who followed his lead found that internalfinancing is the dominant mode of financing in all countries, that financing patterns do not differvery much between countries and that those differences which still seem to exist are not at allconsistent with the common conviction that financial systems can be classified as being eitherbank-based or capital market-based. This leads to a puzzle insofar as it calls into question theempirical foundation of the widely held belief that there is a correspondence between thefinancing patterns of corporations on the one side, and the structure of the financial sector and theprevailing 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 bycomparing and analyzing various ways of measuring financial structure and financing patternsand by demonstrating that the surprising empirical results found by studies that relied on netflows are due to a hidden assumption. It then derives an alternative method of measuringfinancing 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, Japanand the United States. The empirical results, which use an estimation technique for determininggross flows of funds in those cases in which empirical data are not available, are very much inline with the commonly held belief prior to Mayer’s influential contribution and indicate that thefinancial 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 betweenthe financial systems of the countries covered in the present paper. [Andreas H