Secular Patterns in Corporate Finance

Trends in the financing of the corporate sector have been widely discussed in both business and academic circles. It is frequently argued, for example, that corporations' use of debt financing has increased dramatically in recent years. These discussions have been hampered, however, by the lack of a unified theoretical framework. In this paper, an attempt is made to develop such a framework using existing corporate finance theory and some extensions thereof. This theory is then used to interpret available data on aggregate corporate financing patterns over the course of the twentieth century. It is found that corporations' use of debt has undeniably increased in the post-World War II period. Nevertheless, the relative corporate debt level was unusually low in the 1940's and current debt levels are not unprecedented when viewed in the context of the entire century. The tax system, in conjunction with inflation, has probably played an important role in the postwar increases in corporate debt, but these factors appear insufficient to explain longer-term trends. It is argued, then, that supplies of competing securities, such as federal government bonds, as well as the secular development of the financial intermediary system, may also be important determinants of long-run corporate financing patterns.