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7/31/2019 Corporate Finance in France and Germany
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'SVTSVEXI*MRERGIMR+IVQER]ERH*VERGI
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Corporate Finance in Germany and France
A Joint Research Project of the
Deutsche Bundesbank and the Banque de France
With contributions by
Hans Friderichs, Dieter Gerdesmeier,
Elizabeth Kremp, Bernard Paranque,
Annie Sauv, Manfred Scheuer
and Elmar Stss
edited by
Annie Sauv
and
Manfred Scheuer
September 1999
The contributions to this study represent the authors'personal opinions and do not necessarily reflect the viewsof the Deutsche Bundesbank and the Banque de France.
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Deutsche Bundesbank, Wilhelm-Epstein-Strasse 14, 60431 Frankfurt am Main,
P.O.B. 10 06 02, 60006 Frankfurt am Main, Federal Republic of Germany
Telephone 49 69 95 66-1
Telex within Germany 4 1 227, telex from abroad 4 14 431, fax 49 69 5 60 10 71
Banque de France, 31, rue Croix-des-Petits-Champs, 75001 Paris, France
Telephone 33 1 42 92 42 92, fax 33 1 42 92 42 92
Please address all orders in writing to:
Deutsche Bundesbank, Press and Public Relations Division, at the above address, or via
fax 49 69 95 66-30 77,
or to:
Banque de France, 07.1050 Service Relations avec le public 75049 Paris Cedex 01
Telephone 33 1 42 92 39 08, fax 33 1 42 92 39 40
Reproduction permitted only if source is stated.
ISBN 3-933747-23-6
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&RQWHQWV
General introduction and summary 1
E\0DQIUHG6FKHXHUDQG$QQLH6DXYp
CHAPTER 1
The issue of corporate finance: theoretical approaches and
previous empirical results
E\%HUQDUG3DUDQTXHDQG+DQV)ULGHULFKV
1. Introduction 10
2. Traditional approaches to the issue of corporate finance 11
2.1. The neoclassical base theory and recent developments 11
2.2. Selected empirical studies on corporate finance: 14
lessons and limits
3. The institutionalist approach: corporate finance from
the perspective of organizational theory and the theory
of conventions 19
3.1. Organization and convention 20
3.1.1. The relationship between banks and companies 24
3.1.2. The conventions of insolvency law 25
4. Bibliography 27
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CHAPTER 2
The annual accounts databases on non-financial enterprises
of the Banque de France and the Deutsche Bundesbank:
methodological aspects and comparability
E\+DQV)ULGHULFKVDQG$QQLH6DXYp
1. Origins and special features of the databases of the
Banque de France and the Deutsche Bundesbank 34
1.1. Banque de France 34
1.1.1. The FIBEN database 34
1.1.1.1. The Turnover Rating 36
1.1.1.2. The Credit Rating 36
1.1.1.3. The Payment Rating 37
1.1.1.4. Management Rating 37
1.1.2. The CdB database 38
1.2. Deutsche Bundesbank 41
2. Construction of the samples 44
3. Differences in accounting regulations and related
adjustment procedures 50
3.1. Accounting discrepancies which have
been completely eliminated 51
3.1.1. The disclosure of debtors and creditors
according to the degree of economic
integration 51
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3.1.2. The format of the annual accounts
with respect to profit appropriation 52
3.1.3. The disclosure of special tax-based reserves 53
3.2. Avoidable accounting discrepancies 53
3.2.1. The differentiation of other debtors
and creditors 53
3.2.2. The disclosure of financial assets 54
3.3. Insoluble accounting discrepancies 55
3.3.1. Differences in the disclosure and
valuation of provisions 55
3.3.2. Revaluation of assets 56
3.3.3. Differences in the valuation of stocks 56
3.3.4. Differences in accounting for intangibles 57
3.3.5. The treatment of leasing 57
3.3.6. Accounting for grants and subsidies 58
4. Bibliography 62
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CHAPTER 3
Structures of corporate finance in Germany and France:
a comparative analysis for west German and French
incorporated enterprises with special reference to
institutional factors
E\+DQV)ULGHULFKV%HUQDUG3DUDQTXHDQG$QQLH6DXYp
1. Introduction 64
2. Structures of corporate financing compared 65
2.1. The liabilities side 65
2.1.1. Structures and trends of own funds 67
2.1.2. Country-specific patterns of indebtedness 83
2.1.3. Cross-country differences in provisions 109
2.2. The assets side 115
2.2.1. Structures and trends of fixed assets 116
2.2.2. Differences in current assets 122
3. Conclusions from the descriptive analysis 128
4. Bibliography 134
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CHAPTER 4
Estimation of a debt function: evidence from
French and German firm panel data
E\(OL]DEHWK.UHPS(OPDU6W|VVDQG'LHWHU*HUGHVPHLHU
1. Introduction 140
2. Survey: theoretical and empirical literature 141
2.1. Explanatory variables of enterprisess debt 141
2.2. Econometric studies: overview 146
3. Description of the database and some descr iptive statistics 152
3.1. Data and definition of the variables 152
3.2. Unbalanced versus balanced panel 154
3.3. Trimming and balanced samples 156
3.4. Descriptive statistics by size categories 159
4. Standard panel analysis: static model 164
4.1. Analysis of variance 164
4.2. Static model: from OLS to within 166
4.3. Some initial results by size class 171
4.4. First differences: some answers to simple questions with
the static model 172
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5. Dynamic specification of the debt function 175
5.1. Estimation procedure 175
5.2. Exogenous specification of the dynamic borrowing behaviour 176
5.3. Dynamic debt function and endogenous regressors 179
5.4. A smixeds dynamic model 182
5.5. Dynamic estimation by size class 183
6. Summary and conclusions 187
7. Bibliography 191
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*HQHUDOLQWURGXFWLRQDQGVXPPDU\
The present study is the outcome of a joint research project by staff members of the Banque
de France and the Deutsche Bundesbank. The members of the French team were
0LUHLOOH)HUKDQL(OL]DEHWK.UHPS%HUQDUG3DUDQTXHDQG$QQLH6DXYp, who was project
leader in this group. Those involved at the Bundesbank were +DQV)ULGHULFKV
'LHWHU*HUGHVPHLHU (OPDU6W|VV and 0DQIUHG6FKHXHU, who was project leader of the
German team. 0LUHLOOH )HUKDQL left the project at a very early stage, however, due to a
change in her field of work within the Banque de France, and 'LHWHU*HUGHVPHLHU took on
a new assignment within the staff of the European Central Bank in the autumn of 1998,
which meant that he was unable to continue his participation in this study.
The study is based on preliminary work by the European Committee of Central Balance
Sheet Data Offices, which was set up in 1985 to improve the analysis of corporate accounts
data through the exchange of information, the comparison of analytical methods, and the
carrying-out of joint studies. The Committee is currently made up of representatives of the
central banks or the statistical offices of 12 of the 15 EU member states (only Denmark,
Sweden and Luxembourg are not represented) and the European Commission. Over the
past 13 years, the Committee has performed a variety of tasks, one of them being the
creation of a joint harmonized database for the annual accounts statistics of non-financial
enterprises - Bank for the Accounts of Companies Harmonised (BACH) -, which ismanaged by DG II of the European Commission.
As part of the work of the European Committee of Central Balance Sheet Offices,
Germany, Austria, Spain, France, Italy and the DG II set up a working group in 1994 with
the task of comparing the financial situation of European enterprises. In 1997 the working
group presented an initial study entitled tNet Equity and Corporate Financing in Europet,
(Delbreil et al., 1997) which was especially devoted to intermediate economies in which
the capital markets play a much smaller role than in Anglo-Saxon countries. It set out to be
essentially descriptive, and its main objective was to provide a response to questions raised
by both theoreticians and practitioners in the financial sector:
Are there differences in levels of corporate net equity between countries?
Does net equity vary according to the size of the company, irrespective of the country?
Are small companies in a special financing situation in every country?
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The study was the fruit of initial research, but must be considered as the completion of a
first stage in a larger research project. The empirical basis of the study was provided by
individual data from the raw material of the national corporate balance sheet statistics,
which were presented in accordance with the methodological approach of the BACH
database. In addition, considerable efforts were made to ensure the comparability of the
data and, in particular, to neutralize the differences in accounting practice as far as
possible. The results obtained show that the capital structures in the European countries are
the outcome of many different factors, especially of diverging underlying institutional
conditions. Given that situation, the obvious thing to do was to confine further comparative
studies in this area initially to two countries since the differences in the systems of
financing - which obviously tend to be very large from country to country - can be analysed
and presented better in this way than in a multi-country analysis.
The principal aim of this project was to undertake a precise analysis of the respective
systems of corporate financing in France and Germany. An understanding of the specific
features of the financing systems in the various countries is of paramount importance for
monetary policy makers. In particular, after the implementation of the EMU the need for
more accurate information on how the ECBss decisions are transmitted to businesses in
each country is becoming increasingly important, because a knowledge of how the
transmission mechanism works in the different countries is of practical relevance for
preparing the single monetary policy in the Euro system. How private sector agents in thedifferent countries respond to the policy actions of the ECB and how the monetary
authorities and the private sector interact is often conditioned by specific institutional and
structural factors, in particular those determining the functioning of markets, the financial
behaviour of firms and of financial intermediaries and the composition of their balance
sheets (see, for example, BIS, 1995, and Deutsche Bundesbank, 1999).
A central concept for the assessment of the monetary transmission mechanism is that of the
functioning of the specific financial system, because it defines the channels, the factors and
the framework under which changes in the monetary policy instrument variables affect the
financing decisions of firms and, especially, the transmission of monetary policy actions to
the corporate sector by financial intermediaries acting as an interface between the policy
decisions of the central bank and the financing decisions of firms. Therefore, a
comprehensive understanding of the architecture and the operating mechanisms of the
different financial systems is a necessary prerequisite for monetary policy analysis.
However, the analysis of the transmission mechanism itself could for several reasons not
be conducted in the context of this study, but should be subject of further research projects.
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Other objectives of this cooperation were
to promote the exchange of information on corporate balance sheet analysis between the
two institutions,
to assess the usefulness of company data for the preparation of and the ensuing
implementation of monetary policy decisions in EMU, and
to set an example of intensive cooperation between central banks at the European level
within the European Committee of Central Balance Sheet Offices.
To set things in motion, the Banque de France and the Bundesbank decided to launch a
bilateral cooperation project in the field of corporate balance sheet analysis. The two
institutions, which started the project in January 1998, realized that their bilateral
cooperation should initially produce a pilot study and they would appreciate it if studies of
this kind could be extended to other member states.
At the end of November 1998, a joint Banque de France and Bundesbank workshop on the
research project tCorporate Finance in Germany and Francet was held at the Bundesbank.
The workshop was attended by interested members of both central banks, representatives
of the ECB and the EU, as well as a number of university professors with specialexperience in that particular field, namely Professor J.-P. Pollin (University of Orlans),
Professor P. Sevestre (University of Paris - Val de Marne) and Professor R. H. Schmidt
(University of Frankfurt). The participants in the workshop - in particular, the professors as
discussants - gave very helpful comments on a previous version of this study.1 Both teams
took up many of the ideas and suggestions for improvement and included them in the
study. Overall, this study represents a first step towards a comprehensive explanation of the
financing behaviour of enterprises in the countries of continental Europe in general and in
France and Germany in particular. In all the sub-sections of the study, in the theoretical
part, the descriptive analysis and the panel econometric study, a number of questions have
remained open. This is partly due to the fact that necessary additional studies would have
exceeded the length of time allocated for the project, which, from the outset, was limited.
1 We would therefore like to extend our thanks to all participants in the workshop, especially to the
professors, and to F. Ramb, Centre for European Economic Research, Mannheim. We are also grateful for
very helpful comments from M. Debonneuil, Commissariat Gnral du Plan, and D. Rivaud-Danset,Universit Paris 13. Furthermore, we thank M. Ferhani and the translation department of the Banque deFrance for their help. In addition, we are obliged to our colleagues M. Delbreil, M. Bardos (Banque deFrance), H. Herrmann, M. Scharnagl and H.-J. Hansen (Deutsche Bundesbank).
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Unlike earlier country comparisons in this area, the study is distinguished first of all by the
fact that it is based on very large sets of data. The tCentrale de Bilanst (CdB) base of the
Banque de France and the base material of the corporate balance sheet statistics of the
Bundesbank contain the balance sheet data of some 40,000 and 70,000 non-financial
enterprises per year, respectively, and samples were derived from these data for the study.
These are largely representative so that the databases - in contrast to the various approaches
in the literature - also contain a large number of small and medium-sized enterprises,
whose financing behaviour - as experience shows - differs very considerably from that of
large firms. Second, an attempt is made to eliminate, as far as possible, influences due to
differences in accounting practice. Furthermore, the descriptive analysis is supplemented
by a panel econometric study.
Since the Bundesbankss base material for eastern Germany was not nearly as extensive as it
was for western Germany, the study focuses on data from west German enterprises only.
Furthermore, as the CdB database almost exclusively covers incorporated firms, it was
necessary to restrict the analysis to enterprises having these legal forms for the sake of the
comparability of the results. For similar reasons, it seemed necessary to focus on individual
balance sheets of manufacturing corporations. This restriction was based primarily on the
considerations that this sector constitutes the core of industry in both countries and that it
tends to be more homogeneous with respect to its financing structures and customs than
other sectors of the economy, in which specific national financing conventions andpreferences obviously play a more important role. The analysis is mainly based on stock
figures of the balance sheet, owing to the fact that the available annual accounts of German
corporations do not provide a flow of funds statement.
Finally, the time period under review in the study is concentrated on the period 1987 to
1995 and 1996, respectively (only the Banque de France provides figures for 1996), in
order to completely cover the last business cycle, which occurred relatively synchronously
in both countries. It seemed especially appropriate to take 1987 as a starting point as this
was the year in which the Fourth EC Directive was translated into German accounting
legislation (five years later than in France). The minimum harmonization which this
achieved provided the necessary basis for the additional efforts made in this study to
eliminate most of the remaining accounting differences.
&KDSWHU of the study (authors: %HUQDUG 3DUDQTXH and +DQV )ULGHULFKV) gives a brief
overview of the theory of corporate finance and a summary of selected empirical studies in
this area in the recent literature. The main purpose of this chapter is to lay the foundation
for the empirical work. It begins with the Modigliani/Miller approach, which postulates
that all financial structures are neutral in terms of the cost of the various sources of finance,
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and shows the results of the ensuing controversy concerning the restrictive hypotheses of
the basic model, which can be summarized as concluding that capital structure actually
does matter. In addition to this, corporate finance is analysed from the point of view of
organizational theory and the theory of conventions, an approach which is not very well
known in Germany but quite popular in France, and which puts special emphasis on the
institutional determinants of corporate finance.
The subsequent discussion of several selected empirical studies on this issue gives the
impression that the results derived tend to be extremely contradictory, a fact that is mainly
due to a lack of comparability of the data sets used. This led both teams to the following
conclusions: the samples compared should be representative; the sample populations
should be homogeneous; the empirical approach should comprise not only liabilities but
also assets; and - last but not least - indicators should be harmonized. In order to overcome
some basic weaknesses of the studies analysed, considerable efforts were made in
&KDSWHU (written by +DQV)ULGHULFKV DQG $QQLH 6DXYp) to harmonize the data for both
countries as far as possible. It was necessary to develop a comprehensive harmonized
indicator concept which goes a step further than the adjustments taken in the BACH
database. Although such a harmonization approach will never be able to eliminate all the
existing accounting differences, it can undoubtedly be concluded that, in terms of its
representativeness and comparability, the dataset elaborated for this study is largely
superior to those investigated hitherto in the literature.
&KDSWHU (written by+DQV)ULGHULFKV, %HUQDUG3DUDQTXH, and $QQLH6DXYp) examines the
balance sheet structures of both French and German manufacturing firms and their
evolution during the last business cycle in the late eighties and early nineties. The first
section assesses the relative importance of the different financing sources used by the
incorporated enterprises in the two countries. The second section continues with a
description of the major differences in the asset structures. The final section summarizes
the conclusions derived from the findings with particular reference to the architecture and
functioning mechanisms of the corporate financing systems in Germany and France.
In general, the results derived in this chapter indicate that the differences in the systems of
corporate finance in France and Germany can be traced to a large extent to the institutional
context in the two countries. This defines particular rules and conditions under which
enterprises decide on their strategy to solve the capital structure puzzle and which tend to
differ greatly and systematically in the two countries. A very prominent factor is to be seen,
for example, in the relationship between banks and companies.
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The central question of &KDSWHU (written by (OL]DEHWK .UHPS (OPDU 6W|VV DQG 'LHWHU
*HUGHVPHLHU) is: What are the principal determinants of corporate leverage in Germany and
France when using a quantitative approach? To that end, well-known hypotheses derived
from traditional corporate finance theory are tested by applying panel econometrics to
identical debt equations of French and German firms. Various static and dynamic
specifications (including GMM techniques) are estimated for the complete (balanced) data
sets and sub-samples differentiated according to size classes. Underlying the full samples,
French and German firms show in some way a surprisingly parallel behaviour. In the
baseline model assuming exogeneity of the right-hand-side variables long-term growth and
collateral are positively correlated to debt supporting the theory of signalling. The negative
relationship of profit and leverage stands for the pecking order approach and finally the
impact of the cost of finance on enterprises s credit demand is negative, too. Nevertheless
clear differences in borrowing behaviour can be found with respect to the determinants size
and time. Time proxying macroeconomic factors are very important for France, but not for
Germany. On the other hand the variable size plays a major role for total creditors in
Germany only, where small firms depend much more on external funds than large
enterprises. Such a divergent lending outcome between French and German firms may be
based on the country-specific institutional settings. However, dependency of some results
on the econometric specification and the variabless definition underlines the difficulty to
present final answers. Additionally, it can be shown that the borrowing behaviour of firms
of different size classes is not equivalent. This result, which holds for both France andGermany, strengthens the fact that a representative firm and a unique debt equation does
not exist.
Frankfurt am Main Manfred Scheuer
Paris Annie Sauv
September 1999
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,QWURGXFWLRQ
Studies focusing on corporate finance,and more generally speaking on the financial deci-
sions of firms can be grouped into two broad categories according to their analytical point
of view:
The first category comprises research which analyses how financial structures are de-
termined by the relationships between shareholders and managers of companies. In
positing the hypothesis of a maximization of the value of the firm to its shareholders,
(Cobbaut, 1996), such studies focus on the choices made by managers and/or
shareholders between issuing shares and borrowing funds. The underlying frame of ref-
erence is that of neoclassical theory in which the main agent is the tsaver-investort. Seen
from this perspective, the firm is a nexus of contracts stemming from an imbalance of
power in situations in which the symmetry of information is imperfect and a divergence
arises between the respective interests of the shareholders and the managers (Harris and
Raviv, 1991). It seems that such approaches are more suited to describing the
relationship between investors and managers of large firms than to highlighting the
differences in financial behaviour of all enterprises, whether listed or unlisted.
The second category is research on the financing methods adopted by companies with
regard to the nature of their assets and the degree of uncertainty under which agentsmanage their activities - the uncertainty which confronts economic agents not only with
respect to future conditions in the real world, but also as far as the future behaviour of
agents is concerned (Rivaud-Danset, 1996). The work of Coase (1987) and Williamson
(1988) can be subsumed under this category, along with that of Salais and Storper
(1993). This category seems to be applicable more to the financing decisions of SMEs,
which are characterised by a greater dispersion of economic situations and a more re-
stricted access to financial markets, than to those of large firms. From such a perspective
debt and equity seem to imply an alternative governance structure, depending on the na-
ture of the firmss assets and financial needs.
To conclude on this, it should be remembered that the influence (or lack of it) of financing
methods on the value of the company or on its economic activity will depend on its
financing requirements. On this point, if we follow Schumpeter (1935), quoted by Goux
(1995), tthe reigning (neoclassical) theory concords with our own view; like us, the theory
finds nothing of essential importance for the understanding of credit in routine finance
relating to goods (...). We can for this reason eliminate such operating credit from our study
(...)t. At the opposite end of the spectrum, a more traditional approach regards the
financing of corporate operations as having a determining importance. For example, in
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specific advantages of an approach taking into consideration an environment in which
revenue is uncertain, they showed that all financial structures that mix capital and debt are
neutral in terms of the cost of the various different sources of finance, that is to say the
YDOXH RI WKH ILUP. The work of Modigliani and Miller started a controversy on the
restrictive hypotheses of the basic model (taxation, agency costs, asymmetric information)
which led to a confirmation, by Myers and Majluf in 1984, of the idea that, contrary to
general belief, capital raised by calling for funds from the market is more costly than that
obtained from internal sources. In addition, the ULVNRIEDQNUXSWF\, the probability of which
increases with the size of the debt burden and the costs generated by controlling it, limits
any tendency to incur excessive levels of debt (Warner, 1977). Notably, it encourages
shareholders to demand higher rates of return.
Akerlof (1970) and Spence (1974) are described in the literature as the pioneers of the
method based on the VLJQDOOLQJ DSSURDFK. It was not until the latter half of the 1970s
(Ross, 1977) that the signalling approach was applied to the theory of corporate finance.
According to Leland and Pyle (1977), DFRPSDQ\FDQVHQGRXWVLJQDOV about itself in the
percentage of share capital held by its shareholder-manager: this testifies to the reliability
of its investment projects. In the Rosss model, the signal is the type of financing structure
chosen by the managers of the company. The value of a company increases with financial
debt. Since the managers wish to avoid bankruptcy, that is to say, they wish to maximize
their share in the profit, the level of financial debt can be seen as a signal of good corporatemanagement and, by extension, of good corporate performance.
Initially, Myers (1977) was interested in the phenomenon of debt in which both risk and
informational symmetry exist (debt overhang effect), that is to say in a situation in which
nobody possesses privileged information (Hyafil, 1991). He shows that the presence of
risky debt is enough to prevent issuance of shares to finance good projects. The existence
of a hierarchy of sources of finance (pecking order theory) was set out by Myers and Majluf
(1984) after Myers had laid down its broad lines. The situation may change if informational
asymmetry exists: internal funds are preferable to debt, and debt is preferable to equity.
$V\PPHWU\ RI LQIRUPDWLRQ means that the economic agents are not all equally well in-
formed. Because of their position, corporate managers have inside information about the
firmss situation and its prospects for economic and financial development. This asymmetry
explains why, in certain circumstances, recourse to contracted debt may be the preferred
course of action. As far as the company and its lenders of finance are concerned, three
categories of informational asymmetry can be defined1:
1 For a review of the literature on informational asymmetries, see Goyer (1995).
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Asymmetries of information appear before the signing of a loan agreement insofar as it
is difficult for the lenders to discriminate effectively between different requests for
project finance. Such informational asymmetry, which could be termed H[ DQWH
asymmetry, is the source of the phenomenon of adverse selection in the credit market
(Stiglitz and Weiss, 1981). For this reason, interest rates are not a good mechanism for
regulating this market. An increase in rates may lead borrowers offering the lowest
levels of risk to leave the market, only the highest risks remain.
Asymmetries of information also appear during the term of the contract. The borrower
may choose, from among his projects for investment, one with higher risk than the
project actually submitted to the lender on the basis of which the latter extended the
loan. If the lender looks only at the revenue generated by the borrower, he has no
knowledge of the exact nature of the project actually undertaken. He must determine
whether, for example, a reduction in revenue is the result of poor corporate management
or a normal reaction on the part of the company to cyclical variations in its environment.
Such agency problems relate to what has been termed PRUDOKD]DUG.
Finally, asymmetries of information may become apparent H[SRVW. The lender is unable
in this case to evaluate the precise rate of return on the project completed by the bor-
rower, who may have an incentive, in order to minimise his repayments, to declare a
lower amount of revenue than that actually earned (Williamson, 1986); this is calledRSSRUWXQLVP.
All these asymmetries generate DJHQF\ SUREOHPV and therefore monitoring costs. The
creditor perceives a risk of sub-optimal investment policy which may mean that the firm is
capable only of a level of repayment that is lower than its financial liability. Such a risk
will stem either from a strategy of under-investment (Myers, 1977), due notably to
withdrawals of benefits in kind by the entrepreneur, to the detriment of the company, or
from a strategy of over-investment reflecting excessive risk-taking on the part of the
borrower, who is thus transferring wealth from the creditors to the shareholders (Jensen
and Meckling, 1976). The problem of disincentive to invest optimally is assumed in the lit-
erature of economics to be particularly critical in companies with major opportunities for
growth, which may either initiate over-risky projects or pass up possibilities for growth.
The asymmetry of information can explain a specific organization of the relationship
between lenders and borrowers designed to reduce the costs of obtaining information, as
will be described later.
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derived show that the capital structure of the companies under review is far from being
identical in the various countries under consideration, whatever central indicator is used.
The main conclusion to be drawn from an examination of different ratios calculated is that
the ranking of countries according to indebtedness differs greatly depending on whether the
median or the mean ratio is used. The most impressive example is Germany, where the
median shows a very low own funds ratio, while the weighted mean points to a very high
level of capital. These differences between the median and the weighted mean demonstrate
that the weighted mean displays the aggregate situation of industry in each country by sum-
ming all companies to obtain a single balance sheet (as if they all formed just one large
corporation). This ratio is substantially dominated by the situation of big businesses, which,
owing to their large weight, have a significant influence on the result. Unlike the weighted
mean, the median expresses a value central to the distribution of the data without such an
offset. Each company has the same weight, and, for this reason, the median value is
affected by the firms which are most numerous - i. e. the smallest. The impact of large
corporations on the weighted mean is particularly noticeable in Germany, where the overall
figures primarily reflect the behaviour of the very big companies. This problem shows that
it would be more appropriate to use median figures for international comparisons if the
main focus of the study is to analyse the typical behaviour of firms.
Corbett and Jenkinson (1996) demonstrate, using aggregate corporate data and flow
indicators, that over the period 1970-1989 the average indebtedness to banks was percep-tibly lower in Germany than in Japan, the United States or the United Kingdom. However,
they identify two periods, 1975-1979 and 1985-1989, during which this source of funds
was below the general mean, especially in the US and in Germany, an observation which
seems to point to an increased use of internal resources. In addition, Deming-Kunt and
Maksimovic (1996) show that, whatever the country considered, short-term financial
requirements, such as for customers and stocks, correlate positively with financial debt,
particularly over the short-term, something which could be interpreted as an indication of
the firmss efforts to manage financial flexibility.
To sum up, the following conclusions can be drawn from the empirical studies previously
reviewed:
7KHVDPSOHVFRPSDUHGVKRXOGEHUHSUHVHQWDWLYH
As has been demonstrated by the overview of the empirical capital structure com-
parisons, the results seem to be extremely contradictory. Studies based on specific
samples of quoted business corporations find that German companies are invariably in a
favourable financial situation, with very low debt. By contrast, studies based on broad,
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representative samples conclude that French companies have the highest capitalisation
and the lowest debt ratio in Europe. Additionally, in the case of Italy the situation is
sometimes assumed to be similar to that of French companies or, quite the reverse,
Italian companiess financial autonomy is judged to be the lowest of all the countries
considered. In general, listed companies alone are not representative of the industrial
sector of an economy. They represent only a minority of companies in that sector, pos-
sessing special favourable conditions due to their access to financial markets. Further-
more, only large samples not limited to very large listed corporations can allow an
analysis of the size effect on financial debt.
7KHVDPSOHSRSXODWLRQVVKRXOGEHKRPRJHQHRXV
Comparisons have been established, for example, using samples covering companies
with different legal forms or with highly specific financial structures (partnerships and
sole proprietorships as opposed to incorporated businesses). Moreover, the method used
to process the data (aggregation or extrapolation) is sometimes completely divergent,
which likewise substantially influences the results.
7KHHPSLULFDODSSURDFKVKRXOGEHPRUHFRPSUHKHQVLYH
The research concept of some studies remains rudimentary. In reducing the analysis of
the financial structures of companies to the liabilities side alone without taking account
of the structure of their assets, such studies ignore differences in borrowing require-
ments and the related asset-specific patterns of corporate finance.
7KHLQGLFDWRUVXVHGVKRXOGEHKDUPRQL]HG
Assessing and ensuring the comparability of the indicators used is a necessary precon-
dition for reliable research results. This lack of homogeneity with respect to the indica-
tors used distorts the results of many international studies. In such cases no clear conclu-
sions can be drawn from the results as they are massively affected by differences in na-
tional accounting methods and in the structure and organization of national production
systems.
Bearing in mind the considerable difficulties caused by these methodological and sta-
tistical problems, great attention has to be devoted to these issues so as to ensure the
comparability and significance of the results. For the joint study of the Banque de
France and the Bundesbank it was especially important to find an adequate solution to
the outstanding methodological problems, an issue which is described comprehensively
in&KDSWHU
.
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7DEOH6HOHFWHGFRPSDUDWLYHUHVHDUFKUHVXOWVRQFRUSRUDWHILQDQFHVWXGLHVVLQFH
Title Databases and countries Indicators Period, scope and size Main results
Borio, C. E. V. (1990): Financial debt
and financing of non-financial
companies: an international
perspective
OECD financial statistics and na-tional fund flow statistics.
United States, Canada, UnitedKingdom, Japan, Germany, France,Italy.
a) Debt (gross)/total assets;
b) Debt (net)/real assets.
1970-1987;
All industrial or commercialcompanies and manufacturing
industry; Representative national sam-
ples.
According to indicator (a) finan-cial debt higher in France than inGermany; according to (b) the
reverse is true and Italy similarto Germany.
Remolona, E. M. (1990):Understanding internationaldifferences in financial debt trends
BACH (old version) and GlobalVantage Data;
France, Germany, Japan, UnitedKingdom, United States (Italy,Netherlands, Australia).
Debt/assets. 1982-1987 and 1983, 1987;
All companies;
Representative nationalsamples and limitation ofcorporations listed on thestock market to a small num-ber: between 16 companies(France) and 31 (Germany).
Financial debt higher in Francethan in Germany and Italy; Italymore leveraged than Germany.
Global Vantage results data con-firm this observation but showgreater differences betweenFrance and Germany.
Bloch, L./Laudy, J. (1993): France,Allemagne et Belgique: des structuresde bilans proches la fin de ladcennie quatre-vingt
BACH (old version);
France, Germany and Belgium.
a) Net equity (+provi-sions)/balance sheettotal;
b) Net equity (+provi-sions)/fixed assets
(historical costs and mar-ket value).
1985-1991;
Manufacturing industry;
Representative national sam-ples.
If provisions are included in netequity, France shows higherfinancial debt than Germany,otherwise, financial debt higherin Germany.
Deutsche Bundesbank (1994):Comparison of the provision ofbusiness enterprises in selected ECcountries with own funds
BACH (old version)
and national sources;
Germany, France, Spain, Italy.
Net equity/balance sheettotal.
1982-1991;
Manufacturing industry;
National samples.
If no correction is applied formethodological differences be-tween samples and for data proc-essing, German firms are less fi-nancially autonomous than thosein other countries; after correc-tion, situation similar.
Rajan, R.G./Zingales, L. (1995):What do we know about capitalstructure? Some evidence frominternational data
Global Vantage Data;
United States, Japan, Germany,France, Italy, United Kingdom,Canada.
a) Debt+provisions/totalassets;
b) Debt/total assets;
c) Debt/total net assets;
d) Debt/debt+net equity
(median and mean val-ues)
(historical costs and mar-ket value).
1987-1990;
All companies;
Limitation to corporationsquoted on the stock market,ranging from 118 companies(Italy) to 225 (France).
According to (a) financial debthighest in Germany (historicalcosts), and Italy and France verysimilar; according to (b) (c) and(d), Italy more leveraged thanFrance and Germany less thanFrance (positive correlation be-tween size and financial debtwith the exception of Germany).
Kneeshaw, J.T. (1995): A survey ofnon-financial sector balance sheets inindustrialised countries
National sources: INSEE forFrance, Statistisches Bundesamt forGermany, OECD and Banca d'Italiafor Italy, OECD and Banco deEspaa for Spain;
Australia, Belgium, Canada,France, Germany, Italy, Japan,Netherlands, Spain, Sweden, Swit-zerland, United Kingdom, UnitedStates.
a) Financial debt/total as-sets;
b) Financial debt+provi-sions/GDP;
c) Financial debt/GDP;
d) Net equity/GDP,
(market value).
1992;
All non-financial companies;
National samples and macro-economic data.
According to (a) financial debthigher in Germany than inFrance; according to the other in-dicators Italy has the least finan-cial debt and Germany the most;financial autonomy greatest inFrance.
Delbreil, M, et al. (1997 : Equity ofEuropean industrial corporations
Balance Sheet Office;
Germany, Austria, Spain, France,Italy.
Net equity/financial re-sources.
1990-1993 (checked for1995);
Manufacturing industry.
Least financial debt in Franceand Spain;
Germany more leveraged onmedian values, less on aggre-gate data;
Austria ranked between thesepositions;
Least favourable position in It-aly.
Corbett, J./Jenkinson, T. (1996): Thefinancing of industry, 1970-1989: aninternational comparison
Aggregate corporate data proc-essed on the basis of the nationalaccounting standards in each coun-try;
Germany, Japan, United States,United Kingdom.
Net resource flows. 1970-1989. More use of internal finance inUSA, UK and from 1985 to1989, Germany;
More use of equity issues inthe United Kingdom andUnited States;
Bank debt higher in Japan,lower in Germany.
Nayman, L. (1996): Les structures definancement des entreprises enEurope
OECD and BACH;
Germany, France, Italy and theUnited Kingdom.
a) Credit/GDP;
b) Balance sheet structure;
c) Profitability;
d) Resource percentage.
1987-1993;
Non-financial companies.
In 1994, credit/GDP higher inGermany and Italy, lower inFrance, very low in UnitedKingdom;
1987-1992, long-term debthigher in Germany, lower inItaly, UK; short-term debthigher in UK, lower in France.
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7KHLQVWLWXWLRQDOLVWDSSURDFKFRUSRUDWHILQDQFHIURPWKHSHUVSHFWLYH
RIRUJDQL]DWLRQDOWKHRU\DQGWKHWKHRU\RIFRQYHQWLRQV3
In the abundant neoclassical literature devoted to corporate finance the work of Myers and
Majluf (1984) is worthy of special attention owing to their concern to explain the high level
of corporate self-financing. Capital structure can be interpreted in terms of a hierarchy of
preferences (SHFNLQJRUGHUDSSURDFK) in the activation of sources of finance; the choices of
financing method influencing investment decisions can be seen as rational if we allow that
the managers of the company are seeking to maximize the value of the equity of the
existing shareholders (FRUSRUDWHZHDOWK). According to this interpretation, managers prefer
internal resources and call on external finance (with borrowing having priority) largely to
finance unexpected investment opportunities. Observed capital structure is contingent since
it is the result of need, which is unforeseeable, and the actual possibility of obtaining
finance for projects requiring outside resources (borrowing, equity offerings). The regulari-
ties observed cannot be interpreted by reference to any objective of maximising corporate
wealth (either for existing or potential shareholders). For Myers (1977, 1984), capital
structure is not a goal in itself and its make-up is the reflection of the past history of the
companyss borrowing requirements.
Rivaud-Danset et al. (1998) using the BACH database show not one but several preferredpatterns of financing: tA high level of profitability can be achieved by firms whose
financial patterns are distinct. A high level of own funds does not entail automatically
better performances and a higher gross profitabilityt. Then they point out the economic
flexibility of SMEs, which depends on their financial flexibility (Hicks, 1975). Its source
comes from internal liquidity and/or assured borrowing access.
The SHFNLQJ RUGHU DSSURDFK can be reinterpreted in this way, like a bridge between the
neoclassical approach and recent institutionalist concepts of explaining the financing
decisions of firms: to examine the organization of a firm as the process through which the
firm finds (tries to find) the best compromise between its needs of economic flexibility
depending on its possibilities of financial flexibility. Its governance structure is related to
the nature of its assets (and in turn depends on the relationship with other non-financial
firms) and its way of managing financial flexibility (and therefore also to its relationship
with borrowers).
3 This section is based in large measure on earlier work or studies currently under way, notably inconjunction with Rivaud-Danset and Salais (1996) under the research contract between the Banque de
France and the CNRS "Institution et Dynamique Historique de lconomie" IDHE - ENS Cachan researchteam.
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2UJDQL]DWLRQDQGFRQYHQWLRQ
Numerous contemporary proponents of the theory of the firm, notably the evolutionary
economists (Dosi et al., 1990), have highlighted the importance of organizational and/or
technological routines and expertise acquired by a firm through a process of internal
learning (tOHDUQLQJE\GRLQJDQGE\XVLQJt)4. These firm-specific resources, built up over
time, are often tacit and idiosyncratic, and therefore non-transferable (non-re-employable)
outside the company; they are also non-quantifiable in any direct manner since they do not
originate in any clearly identifiable expenditure. Evolutionary analysts, preoccupied by
selection, consider that the competitive strength and the viability of a company are
dependent on its tcore competencet and its relationships with customers and suppliers.
tCore competencet is defined as ta set of differentiated technological skills, complemen-
tary assets and routines forming the basis of the competitive capabilities of the company in
any specific type of activityt (Dosi et al., 1990). Maintenance of such competence
presupposes a certain degree of stability of working relationships over time, which limits
the use of adjustments to the workforce to adapt to variations in the level of activity, and
therefore it is reflected in a high degree of sensitivity of apparent labour productivity to
such variations. It is also possible to consider these resources as not being subject to the
same valuation requirements as physical or intangible investments stated in the balance
sheet. One might therefore assume that a company well equipped with such specialist
resources will be more capable of standing up to major variations in profitability, providedit tends towards a mean level of profitability over a period of several years.
In using the adjective tspecialistt for these resources, we are deliberately seeking to make a
distinction between such resources, on the one hand, and assets dedicated to special re-
quirements, and which are therefore tspecifict in the meaning used by Williamson (1975,
1985, 1986), on the other. According to Williamson, tangible and intangible investments
dedicated to specific purchasers in a context in which economic players can be presumed to
be opportunistic generate a specific risk for the company making such investments. This
risk stems from uncertainty as to the future behaviour of the purchaser. The value of the
assets concerned will depend on the future evolution of the relationship between the
supplying company and its customer. Specific assets play a central role in Williamsonss
theory of the firm. For him, shares and debt are less financing instruments underlying
specific contracts between players than a vehicle for managing the assets structure
(tUHJDUGLQJ GHEW DQG HTXLW\ DV DOWHUQDWLYH JRYHUQDQFH VWUXFWXUHV UDWKHU WKDQ PHUHO\
ILQDQFLDOLQVWUXPHQWVt). Recourse to contracted debt increases as the company uses assets
which are more standardised and less specific. From this point of view, the financing of a
4 The volume by Coriat and Weinstein (1995) presents an overview of the theory of the firm constructed by
evolutionist authors.
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be established between the company and its financial context, will differ according to
whether or not the uncertainty can be dealt with in terms of a risk which can be covered.
Capital structure becomes a standard agreed by the parties and accepted by all players in-
volved. The latter also agree on a level of solvency at the end of the period (when the loan
is to be repaid), corresponding to H[ DQWH business profitability (Fayolle and Fleurbaey,
1990): it is this anticipated profitability which guides financing strategies. Financial debt
standards are neither independent of those for profitability nor constant. They change over
time and from place to place, they are sensitive to quantity-based credit rationing and to
interest rates, as well as to the treal economyt. Within any national system of financing, a
congruence is established between monetary regime, financing methods and type of
specialisation. For example, in France in the 1970s, the low mark-up ratios of companies,
due not only to the pay bargaining process but also to the limited possibilities for adding
value to products, was associated with a financial policy aimed at increased debt and a
monetary policy aimed at low real interest rates (Chanel-Reynaud, 1995). The strong franc
policy helped to change all these features by accentuating the shift of specialisation in
French industry towards high value-added products, in other words, towards products with
high mark-up ratios.
The diversity (as opposed to homogeneity) of capital structure may be dealt with by starting
out from the hypothesis on which financial conventions are based, i. e. that a companyss
borrowing requirements have every reason to vary in form, time horizons and intensity as a
feature of its organizational model and its product (Rivaud-Danset and Salais, 1992).
However, certain forces tend to promote a homogenisation of capital structure:
The greater or lesser variety of financing conventions depends not only on the diversity
of products but also on the way in which lenders of funds build up and process
information, on the availability to them of tools for the analysis of risk and for the
measurement of variation in levels of performance of individual products.
Financial debt can then be analysed as a standard related to rates of return H[ DQWH
(financial debt capacity) and H[SRVW(actual self-financing capacity). However, the rate
of return is not an indicator of the hierarchical ranking of product models;
organizational and product models are profitable if they are implemented in a consistent
manner (Salais and Storper, 1993; Rivaud-Danset and Salais, 1992; Paranque et al.,
1996).
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According to the focal points associated with financing conventions discussed above,
capital structure is likely to have an effect on the activity of non-financial companies,
generally centred on the financing of investment, shifts to embrace cash in hand or the need
for extra liquidity to finance short-term fluctuations in circulating capital and the desire for
flexibility, as defined by the ability to adapt to unforeseen events (Rivaud-Danset and
Salais, 1992). The resulting mix of different sources of finance reflects the need for
financial flexibility imposed by the companyss commercial outlets and organizational
patterns. This flexibility may be considered to be analogous to that needed in the
management of the workforce and operating cycles. This distinction between types of re-
sources is that proposed by Hicks (1975) between DXWRHFRQRP\ and RYHUGUDIW. According
to this author, an implicit or explicit guarantee of access to current credit may provide
companies in overdraft with flexibility equivalent to that conferred by the holding of finan-
cial assets in the case of companies within auto-economy (Hicks, 1975). Firms may find
themselves in one or another of these situations, but they may also choose from among the
different financing sources a principal source or a combination of sources which best meets
their needs for financial flexibility. More specifically, the financial structure of a company
is shaped by the way in which it manages such needs and, particularly, by its capacity to
obtain guaranteed access to credit, and thereby its greater or lesser exposure to the risk of
credit rationing and/or variations in rates. The hypothesis which posits the structure of
corporate financing as being dependent on financial determinants (resources available to
the company, access to substitute sources of funds, cost etc.) and, possibly, also on realdeterminants, is thus open to testing. To be more precise, a proposition is posited whereby
these real determinants are not limited to opportunities for investment and include
characteristics of the company which are defined by reference to the nature of the
predominant uncertainty and the reason for seeking finance (fixed versus circulating
capital). They therefore lead to a focus on problems of co-ordination between economic
players.
More generally speaking, the firm is an institution because laws and rules organize its
activities and the co-ordination between inside players. But the firm also works with other
institutions and within other institutions. In this way, its behaviour depends on the goals
and, in turn, the organization of those institutions (Salais and Storper, 1993; Salais, 1994).
The market is a mechanism which probably allows this co-ordination, but in many cases it
is not sufficient, since prices are not fully efficient as a central coordination instrument.
Under such conditions, conventions like solvency law or commitment relationships are
necessary in order to overcome the initially existing uncertainty: the agents need co-
ordination to reduce uncertainty in order to be able to plan their decisions. To sum up, ac-
cording to the theory of conventions, companies will differ systematically in their financial
structures not only as far as cross-country comparisons are concerned but also within the
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national context according to their financing requirements, in particular the different needs
for financial flexibility, which for their part heavily depend on the nature of their products.
But even more important is the fact that the differences in the financial structures of
enterprises can be understood only by taking into account the different financing
conventions as the principal co-ordination mechanism between the company and its
business partners: as far as banking intermediation is concerned, these are the rules which
dominate the relationship between banks and their corporate customers, but also the legal
context, especially insolvency law, which shape the relationship between creditors and
their respective debtors. Thus the theory of conventions develops a new framework for
financial analysis: financial structures are the complex result of an interaction between the
nature of the firm and its products, especially the industrial organization, the product-
market and the quality etc., and its financing partners as well as the specific institutional
factors that provide the framework for individual action. Therefore, it is essential to un-
derstand the basic constitutional principles of each national corporate finance system in
order to explain the existing cross-country divergencies in capital structures.
7KHUHODWLRQVKLSEHWZHHQEDQNVDQGFRPSDQLHV
As Davis (1995) emphasizes, the relationship between banks and companies constitutes a
specific means of reducing credit risk. From this point of view, we may follow Rivaud-
Danset and Salais (1993) in defining two types of relationship according to the nature ofthe commitments of each party: procedure-based banking and commitment-based banking.
However, according to Davis (1995), who refers to von Thadden (1992), an excessively
close relationship between the bank and the company may overly encourage short-term
investment. This prompts the question of what is the causal direction in this context: could
it be, as far as commitment-based banking is concerned, the need for financial flexibility,
and hence the need for liquidity, that gives firms without liquid financial assets an
incentive to enter into such a close relationship with the bank?
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LQYROYHGIRUWKHDFTXLVLWLRQDQGSURFHVVLQJRILQIRUPDWLRQ7KHTXDQWLW\RIGDWDSURYLGHGLVOHVV
LPSRUWDQWWKDQWKHFDSDFLW\IRUSURFHVVLQJLWVSHFLDOLVHGH[SHUWLVHQHFHVVDULO\DFTXLUHGRYHU
WLPHDQGWKHHVWDEOLVKPHQWRIDQLQGLYLGXDOLVHGUHODWLRQVKLSDOORIZKLFKHQDEOHWKHEDQNWR
JHWWRNQRZLWVFXVWRPHU,QWKHRWKHUGLUHFWLRQWKHH[SHUWFDSDELOLW\DFTXLUHGE\WKHEDQNDQG
WKHEXLOGLQJRIDFORVHUHODWLRQVKLSJXDUDQWHHWKHFRPSDQ\DTXDOLW\RILQIRUPDWLRQZKLFKLWZRXOGRWKHUZLVHKDYHGLIILFXOW\LQDFTXLULQJt(Rivaud-Danset and Salais, 1992)
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Generally speaking, bankruptcy procedures are FROOHFWLYH OHJDO FRQYHQWLRQV for the
recovery of debts by creditors. But national jurisdictions on this issue are very different, so
that the existing insolvency proceedings can be roughly divided into pro-creditor and pro-
debtor related systems (Wood, 1995). Pro-creditor related systems are systematically
oriented towards the protection of creditors resulting from a debtor default. This kind of
proceedings is primarily concentrated on the liquidation of the debtorss assets and the
distribution of the proceeds realized to the creditors involved. Therefore, these insolvency
regulations are currently classified as liquidation procedures. In contrast to that, pro-debtor
related systems intend to save defaulters and their employees from the viewpoint that the
creditors, too, have to contribute to this rescue. That kind of proceedings is commonly
called a restructuring or rehabilitation insolvency procedure, as the maintenance of
economic activity, with the goal of finally rehabilitating the ailing enterprise and
safeguarding the jobs at risk, has priority over the detrimental effect on creditor rights. The
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degree of protection granted to creditorss rights constitutes another important criterion for
ranking insolvency proceedings into pro-debtor and pro-creditor related systems. The goal
of maintaining the activity of the bankrupt firm within a restructuring insolvency procedure
makes it necessary to shield the enterprise that is experiencing difficulties from the legal
measures of its creditors in order to prevent an early destruction of the insolventss estate.
Imposing a freeze on the enforcement of secured debt or a debt moratorium, which amount
to a certain temporary destruction of creditors s rights, are the logical consequence of such
an approach. Furthermore, as bankruptcy systems in general have to establish a ladder of
payment, the systems differ systematically with respect to deciding who are the super-
priority or priority creditors who are largely outside the bankruptcy procedure and are paid
in full. Major differences have to be recognised concerning the secured creditorss position
in relation to competing interests. In pro-creditor related systems, secured creditors have
absolute priority over all other categories of existing claims, while in pro-debtor related
systems the insolvency administrator can often raise super-priority moratorium loans to
finance the rehabilitation but which downgrade existing security. In addition, employees s
salaries, bankruptcy administration costs and taxes often enjoy preferential treatment
before secured debt is paid. As this regime favours a special class of unsecured creditors, it
devalues the purposes of security in enterprise financing: security is designed to be a fair
exchange for the credit, it protects against insolvency losses, as it allows the payer the right
to the asset. It appears evident that pro-creditor related systems, in which the secured
creditor rights are fully respected and prioritised, encourage excessive bank financing ofenterprises as the probable insolvency losses of banks are minimised. Under such
conditions it may be expected that own funds lose much of their function as credit
guarantees, as in cases of financial distress securities provide a safer cover for loans than
own funds do owing to the insolvency-proofness of collateral. Therefore, cross-country
differences in the level of capitalisation and leverage of companies tend to depend directly
on the legal conventions concerning the degree of protection of creditors s rights provided
by the national insolvency procedures.
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Demartini, A./Kremp, E. (1998): Structure du passif des entreprises industrielles de 1988
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growth. An international comparison, World Bank, Policy Research Working Paper 1671
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enterprises, Monthly Report, October, pp. 25-29
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selected EC countries with own funds, Monthly Report, October, pp. 73-86
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de la cohrence de la grande entreprise, Revue dsconomie Industrielle, pp. 238-257
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performance: a theoretical framework, MIT Working Paper
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297-355
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Revue Franaise de Gestion, pp. 175-190
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agency costs and ownership structure, The Journal of Financial Economics, 3, pp. 305-360
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Knight, F. (1921): Risk, uncertainty and profit, Boston/New York
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of investment, American Economic Review, 48, pp. 261-275
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&+$37(5
7KHDQQXDODFFRXQWVGDWDEDVHVRQQRQILQDQFLDOHQWHUSULVHVRI
WKH%DQTXHGH)UDQFHDQGWKH'HXWVFKH%XQGHVEDQNPHWKRGRORJLFDO
DVSHFWVDQGFRPSDUDELOLW\
E\+DQV)ULGHULFKVDQG$QQLH6DXYp
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The tBanque de France ratingt comprises three elements:
a turnover rating given by a letter from A to H, J, N or X,
a credit rating given by a figure, 0, 3, 4, 5 or 6,
a payment rating given by a figure, 7, 8 or 9.
7KH7XUQRYHU5DWLQJ
It indicates the level of turnover according to the table below:
A turnover equal to or greater than FRF 5 billion
B turnover between FRF 1 billion and FRF 5 billion
C turnover between FRF 500 million and FRF 1 billion
D turnover between FRF 200 million and FRF 500 million
E turnover between FRF 100 million and FRF 200 million
F turnover between FRF 50 million and FRF 100 million
G turnover between FRF 10 million and FRF 50 million
H turnover between FRF 5 million and FRF 10 million
J turnover less than FRF 5 million
N non-significant turnover (holding companies that do not publish consolidated accounts, firms that do not directly carry on anindustrial or commercial activity or whose activity cannot be measured by turnover).
X turnover not available or out of date (accounting year ended more than 21 months ago)
7KH&UHGLW5DWLQJ
The credit rating expresses the assessment made of the business. There are 5 credit ratings:
a t0t credit rating is given to a firm for which the Banque de France possesses no recent
accounting documents and about which it has received no unfavourable information,
a t3t credit rating is an excellent rating reserved for firms enjoying the best Banque de
France assessment of their creditworthiness and whose debt capacity is totally
guaranteed,
a t4t credit rating is given to firms whose situation reveals a degree of fragility
(particularly falling profitability), but which do not give cause for concern,
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Rating t040t: the information calls for particular attention. This rating is given to a
manager who holds office as a legal representative in a company which has been put
into judicial liquidation within the last five years or in two companies at least with
payment ratings oft9t.
Rating t050t: the information gives cause for concern. This rating is given to a manager
who holds office as a legal representative in two firms which have been subject to a
judicial liquidation order within the last five years or to a manager required to pay the
debts of the legal person, whatever the amount of the pecuniary liability.
Rating t060t: the information gives grave cause for concern. This rating is given to a
manager who holds office as a legal representative in at least three companies which
have been subject to judicial liquidation, or who is personally the subject of a decisionof the courts.
The information available in the FIBEN database is used in order to assess the
creditworthiness of firms and is very helpful for risk-monitoring purposes. The FIBEN data
have been used more recently for some special studies. But in the past all the studies were
conducted on the basis of the variety of information available in the tCentrale de bilanst
(Central Balance Sheet Data Office) database of the Banque de France.
7KH&G%GDWDEDVH
In 1968, at the request of the tCommissariat Gnral du Plant (Planning Commission), the
Banque de France set up a more specific corporate balance sheet database with the purpose
of complementing the national accounts with statistics on size and sector. The mission of
the Banque de France is to provide monetary authorities and economic decision-makers
with valuable information on the economic environment through the analysis of aggregated
data on firms. The data derived from company annual accounts constitute the source
material for conducting studies at a macro or microeconomic level and for undertaking
sectoral and financial analysis. This database, known as CdB tCentrale des bilanst, is a
collection of data from firms which agree to submit their annual accounts on a voluntary
basis and which, in return for their voluntary participation, receive every year individual
reports that provide useful decision-making assistance. Historical series from 1971 to the
present make it possible to study long-term economic cycles. About 38,000 firms among
the broad FIBEN population, previously mentioned, submit their corporate tax returns as
well as an additional information report (tdossier de collectet) containing more precise
information on loans from groups, the breakdown of the different financial costs and
supplementary information on leasing and on business restructuring. The additionally
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collected data for the CdB base, which are provided in a very detailed form, are extremely
important for financial analysis, especially with respect to international comparisons.
Owing to the fact that, unlike in FIBEN, most of the information necessary for harmonising
French and German balance sheets is available in the CdB base, the samples for this study
were drawn entirely from that base. This choice boils down to an approach which favours
comparability of information at the cost of a certain loss of representativeness.
The representativeness of the CdB database is regularly checked. Investigations are carried
out on the database to control the quality of the sample and the coverage based on the
number of employees. These controls are conducted by size and sector. The aim is to reach
full coverage for large enterprises (500 and more employees), especially in manufacturing
industry. The coverage rate should reach 50 % in medium-sized companies and 10 % in
small companies. If the coverage does not reach this threshold, the Central Balance Sheet
Data Office in Paris asks the branches to contact new companies of the sectors or sizes
which are poorly represented in the database. The following table shows that the coverage
is quite good in manufacturing industry in every size class according to the Banque de
France criteria. The CdB base is currently unrivalled in France because no other database
stores accounting data on the results, the cash flows and the financial structure of industrial
companies over a 20-year period.
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not very meaningful, as could be demonstrated for the German samples. Unfortunately, no
comparable results based on turnover coverage ratios are available for France. As measured
by the number of employees, the French sliding sample for 1994/95 covers approximately
60 % of the total workforce in manufacturing industries. In addition, 7DEOH
7DEOH6L]HVWUXFWXUHRIWKHVOLGLQJVDPSOHV
D)UDQFHTwo-year sliding sample (1994/1995)
Size class Number of corpo-
rations
Frequency
Total 14,476 100.0 %
1 - 19 Employees 3,125 21.6 %
20 - 99 Employees 7,901 54.6 %
100 - 499 Employees 2,772 19.1 %
500 - 1,999 Employees 577 4.0 %
2,000 and more Employees 101 0.7 %
E*HUPDQ\ Two-year sliding sample (1993/1994)
Size class Number of corpo-
rations
Frequency
Total 9,260 100.0 %
1 - 19 Employees 1,774 19.2 %
20 - 99 Employees 4,086 44.1 %
100 - 499 Employees 2,552 27.6 %
500 - 1,999 Employees 662 7.1 %
2,000 and more Employees 186 2.0 %
clearly indicates that the sectoral composition of the samples for the two countries seems to
be substantially different. The German samples primarily consist of corporations in the
intermediate and capital goods industries, while durable and non-durable consumer goods
are covered to a far less extent. Unlike the German sliding samples, the French coverage
ratios display a more homogeneous composition by sector of economic activity. Only the
capital goods sector appears to have a particularly high coverage. These differences tend to
furnish additional evidence that the Bundesbankss database is definitely more selective than
the CdB-base of the Banque de France, essentially becauce the structures of the base
material mirror the extent to which the bill of exchange is used as a financing instrument in
each particular industry.
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7DEOH'HJUHHRIUHSUHVHQWDWLYHQHVVRIWKHVOLGLQJVDPSOHV
D)UDQFHTwo-year sliding sample (1994/1995)Reference: exhaustive survey of the INSEE
Sliding sample in 1995 Coverage b\
Size/sector Number of en-
terprises
Number of
employees
number of
enterprises
number of
employees
Total 14,476 2,064,506 16.7 % 56.0 %
1-19 Employees 3,125 38,813 5.2 % 9.8 %
20-99 Employees 7,901 357,178 38.3 % 42.3 %
100-499 Employees 2,772 572,919 58.7 % 59.7 %
500-1,999 Employees 577 523,664 70.8 % 71.7 %
2,000 Employees and more 101 571,932 71.1 % 75.8 %
Intermediate goods 6,419 832,698 19.4 % 56.1 %
Capital goods 3,195 630,061 16.8 % 61.8 %
Durable consumer goods 626 84,323 12.9 % 50.6 %
Non-durable consumer goods 4,236 517,424 14.4 % 51.0 %
E*HUPDQ\Two-year sliding sample (1993/1994)
Reference: exhaustive survey of the turnover tax statistics
Sliding sample in 1994 Coverageby
Sector Number of en-
terprises
Turnover
(DM)
number of en-
terprises
turnover
Total manufacturing
RQO\LQFRUSRUDWHGHQWHUSULVHV 9,260 1,012,298,728 12.9 % 71.4 %
Total manufacturing
DOOOHJDOIRUPV (9,260) (1,012,298,728) 3.7 % 50.8 %
Intermediate goods 4,148 443,934,276 4.5 % 56.7 %
Capital goods 3,049 384,491,114 6.2 % 59.8 %
Durable consumer goods 397 34,576,763 2.0 % 37.5 %
Non-durable consumer goods 1,666 149,296,575 1.8 % 31.4 %
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'LIIHUHQFHVLQDFFRXQWLQJUHJXODWLRQVDQGUHODWHGDGMXVWPHQW
SURFHGXUHV
As the central point of this study was to focus on the financing structures of French and
German incorporated enterprises based not only on a fairly representative dataset but also
on largely comparable balance sheet information, considerable efforts were made to
harmonize the data for the two countries as far as possible in order to overcome the basic
weaknesses of most empirical studies in the field of comparative financial statement
analysis. There is no doubt that the translation of the Fourth EC Directive into national
accounting legislation represented a considerable step towards reducing the accounting and
auditing differences for individual accounts in the EU member states. However, as that
Company Law Directive only attempted to set up minimum standards for financial
reporting and, in particular, avoided standardising existing national valuation practises,
substantial differences still persist - not only in national accounting regulations but also in
country-specific accounting rules - a fact that is especially evident in the financial reporting
of French and German corporations. In addition, institution-specific concepts for the defini-
tion of certain ratios which were found for both the Banque de France and the Bundesbank
(e. g. the Bundesbankss net own funds concept) had to be suppressed, and it was necessary
to develop a comprehensive harmonized