Debt, Folklore, And Cross‐Country Differences In Financial Structure

Conventional wisdom has long held that, in relationship‐based economies such as Japan and Germany, corporations are able to borrow more than U.S. companies, which in turn reduces their cost of capital and gives them a competitive edge. But such folklore does not stand up to scrutiny. In Japan and Germany, large businesses do not borrow more than U.S. companies–and, in fact, judging from coverage ratios, German companies (as well as U.K. companies) seem to borrow considerably less than their international competitors. The article also reports that, in countries where financial markets are “transparent,” the development of the banking sector has little additional impact on the growth of “financially dependent” industries. That is, although industries that require a lot of external finance grow faster in countries where the bank credit‐to‐GDP ratio is high, the growth rates of such industries are much more correlated with the level of accounting standards (with high standards serving as a proxy for well‐developed capital markets) than with a strong banking system.