New Issues in Corporate Finance

Flow of funds data are used to compare methods of financing the corporate sector in five countries over the period 1970-85. Many of the problems associated with previous studies of corporate finance are avoided by defining financing proportions in net terms. The degree of consolidation of accounts, reciprocal arrangements between borrowers and lenders, and compensating deposit requirements on borrowers no longer distort financing patterns when net financing is the focus. Corrections for inflation are provided by employing flow rather than stock figures and using own aggregation procedures to derive stock measures. Significant variations in financing emerge. These are not readily explained by traditional explanations of corporate financing decisions, in particular those which emphasize tax considerations. The paper suggests an alternative approach, which emphasizes that relationships between borrowers and lenders establish forms of commitment that are conducive to the provision of long-term finance. This approach suggests that the separation between the analysis of investment and that of finance, which has been the starting point of corporate finance theory, is untenable in a multi-period context in which terms of finance define future allocation of control.