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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 views of the Deutsche Bundesbank and the Banque de France.

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

&RQWHQWV

General introduction and summary E\ 0DQIUHG 6FKHXHU DQG $QQLH 6DXYp

CHAPTER 1 The issue of corporate finance: theoretical approaches and previous empirical results E\ %HUQDUG 3DUDQTXH DQG +DQV )ULGHULFKV

1. 2.

Introduction Traditional approaches to the issue of corporate finance 2.1. The neoclassical base theory and recent developments 2.2. Selected empirical studies on corporate finance: lessons and limits

10 11 11 14

3.

The institutionalist approach: corporate finance from the perspective of organizational theory and the theory of conventions 3.1. Organization and convention 3.1.1. 3.1.2. The relationship between banks and companies The conventions of insolvency law 19 20 24 25 27

4.

Bibliography

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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 )ULGHULFKV DQG $QQLH 6DXYp

1.

Origins and special features of the databases of the Banque de France and the Deutsche Bundesbank 1.1. Banque de France 1.1.1. 1.1.1.1. 1.1.1.2. 1.1.1.3. 1.1.1.4. 1.1.2. The FIBEN database The Turnover Rating The Credit Rating The Payment Rating Management Rating The CdB database 34 34 34 36 36 37 37 38 41 44

1.2. Deutsche Bundesbank 2. 3. Construction of the samples Differences in accounting regulations and related adjustment procedures 3.1. Accounting discrepancies which have been completely eliminated 3.1.1. The disclosure of debtors and creditors according to the degree of economic integration

50

51

51

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3.1.2.

The format of the annual accounts with respect to profit appropriation 52 53 53

3.1.3.

The disclosure of special tax-based reserves

3.2. Avoidable accounting discrepancies 3.2.1. The differentiation of other debtors and creditors 3.2.2. The disclosure of financial assets

53 54 55

3.3. Insoluble accounting discrepancies 3.3.1. Differences in the disclosure and valuation of provisions 3.3.2. 3.3.3. 3.3.4. 3.3.5. 3.3.6. 4. Bibliography Revaluation of assets Differences in the valuation of stocks Differences in accounting for intangibles The treatment of leasing Accounting for grants and subsidies

55 56 56 57 57 58 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 %HUQDUG 3DUDQTXH DQG $QQLH 6DXYp

1. 2.

Introduction Structures of corporate financing compared 2.1. The liabilities side 2.1.1. 2.1.2. 2.1.3. Structures and trends of own funds Country-specific patterns of indebtedness Cross-country differences in provisions

64 65 65 67 83 109 115 116 122 128 134

2.2. The assets side 2.2.1. 2.2.2. 3. 4. Structures and trends of fixed assets Differences in current assets

Conclusions from the descriptive analysis Bibliography

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CHAPTER 4 Estimation of a debt function: evidence from French and German firm panel data E\ (OL]DEHWK .UHPS (OPDU 6W|VV DQG 'LHWHU *HUGHVPHLHU

1. 2.

Introduction Survey: theoretical and empirical literature 2.1. Explanatory variables of enterprisess debt 2.2. Econometric studies: overview

140 141 141 146 152 152 154 156 159 164 164 166 171

3.

Description of the database and some descriptive statistics 3.1. Data and definition of the variables 3.2. Unbalanced versus balanced panel 3.3. Trimming and balanced samples 3.4. Descriptive statistics by size categories

4.

Standard panel analysis: static model 4.1. Analysis of variance 4.2. Static model: from OLS to within 4.3. Some initial results by size class 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 5.1. Estimation procedure 5.2. Exogenous specification of the dynamic borrowing behaviour 5.3. Dynamic debt function and endogenous regressors 5.4. A smixeds dynamic model 5.5. Dynamic estimation by size class

175 175 176 179 182 183 187 191

6. 7.

Summary and conclusions Bibliography

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*HQHUDO LQWURGXFWLRQ DQG VXPPDU\

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 %HUQDUG 3DUDQTXH DQG $QQLH 6DXYp, who was project leader in this group. Those involved at the Bundesbank were +DQV )ULGHULFKV 'LHWHU *HUGHVPHLHU (OPDU 6W|VV and 0DQIUHG 6FKHXHU, 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 is managed 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 the different 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 special experience 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 de France for their help. In addition, we are obliged to our colleagues M. Delbreil, M. Bardos (Banque de France), 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 and preferences 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, -4-

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, %HUQDUG 3DUDQTXH, and $QQLH 6DXYp) 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 enterprisess 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 and Germany, strengthens the fact that a representative firm and a unique debt equation does not exist.

Frankfurt am Main Paris September 1999

Manfred Scheuer Annie Sauv

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%LEOLRJUDSK\
BIS (1995): Financial structure and the monetary policy transmission mechanism, CB 394, Basle Delbreil, M. et al. (1997): Equity of European industrial corporations, European Committee of Balance Sheet Offices - Net Equity Group, Paris Deutsche Bundesbank (ed.) (1999): The monetary transmission process: recent developments and lessons for Europe, Houndmills (forthcoming)

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 ,QWURGXFWLRQ
Studies focusing on corporate finance, and more generally speaking on the financial decisions 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 determined 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 reference 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 agents manage 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 restricted 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 nature 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 - 10 -

France, because of its institutional specificities, the influence of monetary policy seems to be less likely to affect SMEs through their investment policy than large corporations, although the former are more sensitive to the conditions and possibilities for financing of their operating cycle and are therefore more exposed to the effects of upward swings in short-term rates. Conversely, in a context of recession or at least during an economic downturn, a fall in those same rates could lighten financial costs but have little impact on activity, owing to the lack of opportunities justifying commitment of investment capital. The VHFRQG 6HFWLRQ of this chapter briefly reviews the main implications of the traditional neoclassical approach to corporate finance in order to highlight what is in our opinion the core of the hypothesis: the rationality of the investor who has to choose between different kinds of assets following a portfolio decision process. This attitude might be the one adopted by both managers and shareholders in large firms which have access to financial markets. In addition, this section summarizes the empirical results of selected studies on corporate finance and points out that further difficulties arise when international comparisons are attempted, not only because of the problem of obtaining adequate and comparable data but also as a consequence of cross-country differences as regards the institutional and social factors which shape and diffuse corporate financing relationships. Finally, the last paragraph tries to outline very briefly the basic ideas of very recent and more complex approaches to the issue of corporate finance, which to some extent have been the frame of reference for our own empirical study: the explanation of the financial decisions of companies as the result of an organizational process called tconventiont (Revue Economique, 1989; Clerc, 1998).

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Every industrial strategy, whether its aim is internal or external growth, has its own matching financial strategy. That strategy involves the chosen method of financing, that is to say the choice between internal resources, borrowing, or calls for funds from shareholders. In theory, there are many possible choices between these different sources of finance, although for some firms the range of options is drastically reduced by the existence of constraints, notably of institutional origin. For example, it is not easy for SMEs to raise funds on capital markets.  7KH QHRFODVVLFDO EDVH WKHRU\ DQG UHFHQW GHYHORSPHQWV From the theoretical point of view, Modigliani and Miller were the first, in 1958, to produce models for the optimisation of financial structures. After having demonstrated the - 11 -

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 ULVN RI EDQNUXSWF\, 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), D FRPSDQ\ FDQ VHQG RXW VLJQDOV 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 corporate management 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 informed. 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 PRUDO KD]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 borrower, 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 called RSSRUWXQLVP. 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 literature 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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 6HOHFWHG HPSLULFDO VWXGLHV RQ FRUSRUDWH ILQDQFH OHVVRQV DQG OLPLWV Many empirical studies have been devoted to capital structures. The perhaps disappointing conclusion to be drawn from this work is that assigning an unequivocal meaning to the level of debt or the degree of financial autonomy is a far from straightforward task. This is because the financing strategy might lead to divergent interpretations, depending on whether the capital structure is regarded from the perspective of the investor or the banker: what may be a sign of good corporate health for the investor may be a sign of corporate vulnerability for the banker. The common problem underlying all these studies is explicitly that of the maximization of the value of the firm within the limits set by the control of risk. This is an issue which constitutes the core of the neoclassical theory, for which the value of an enterprise corresponds to the present value of the revenue flows generated by that enterprise. However, it is far from easy to implement models based on this approach, since by definition tthe financial goal of the firm is to maximize the market value of the equity (shares)t, but determining that value is possible only if the enterprise is quoted on the stock exchange (Cohen, 1994; Cobbaut, 1996)2. In principle, benchmarks are necessary for the analysis of financial structures, as reference points for cross-company comparisons. The existence of an optimal financial structure, if we had a complete economic theory on this issue, would offer the most natural benchmark for the present study. Regarded from this perspective, international comparisons should be capable of assessing the existence of cross-country differences in financing patterns by determining the institutional components that help to explain variance: differences in tax regimes applicable to corporate earnings, interest on bonds and on bank debt, differences in bankruptcy legislation, differences in the regulatory control of share and bond markets, bank-company relationships in relation to long-term stability and the level of potential agency costs, the scope of national savings and the mean level of saverss risk aversion. International comparative studies are rare, a fact which can no doubt be explained by the problems of finding comparable and reliable data on corporate finance. The table below summarizes a number of recent studies which relate to European countries, giving a comprehensive overview of the empirical difficulties associated with comparisons of crosscountry capital structures or financial patterns.

2 Much research has been devoted to proving or disproving the validity of the theoretical models. Readers interested in this may consult the bibliography at the end of this paper, which lists a number of these studies, and the general review of Harris and Raviv (1991), which provides an overview of the main empirical results obtained using market data for companies in the Anglo-Saxon countries. Among other conclusions, it would appear that, in line with signalling theory, leverage correlates positively with company value.

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Using stock ratios and a sample of listed companies in the G-7 countries, Rajan and Zingales (1995) analyse capital structures in 1991 by using market and accounting indicators as explanatory factors. Overall, the aggregated level of financial debt is similar across all the countries under review with the exception of Germany and the United Kingdom, where it was apparently lower. This conclusion partly matches the findings of the Bundesbank (1994), which show that the net equity of German, Italian, Spanish and French firms tends to be quite similar as far as aggregated data are concerned under the condition that the main methodological and accounting differences are eliminated. The author underscores the existence of a significant bias due to differences in accounting, data collection, statistical processing methods used to compile the statistics and the choice of indicators. Such difficulties may explain why Remonola (1990), studying the period 19821987, and Borio (1996), studying the years 1970 to 1987, using aggregate accounting data and the debt-to-assets ratio, observe a higher level of financial debt in France compared to that in Germany, whereas Kneeshaw (1995), comparing the years 1982/1992, finds the contrary to be the case using debt-to-assets, debt-to-net equity and financial debt-to-GDP ratios (see Nayman, 1996 for the last of these). The choice (or rather the availability) of data and the selection of indicators likewise appear to be of outstanding importance for the assessment of the influence of firm size on financial debt. Rajan and Zingales find that financial debt rises with size, except in Germany. Their explanation for the observed graduation by size is that the bigger the company the more it can diversify and therefore reduce its probability of finding itself in difficulty (since the probability of bankruptcy is lower, it can accumulate more debt). This explanation seems to apply in the case of listed companies, whose investment choices are directed by the goal of maximising the value of their firm. They can benefit from the higher gearing owing to their greater opportunities to increase debt, as their portfolio of assets allows them to collateralise their liabilities. But if both listed and unlisted companies are analysed, an inverse relationship can be observed between size and debt (Bundesbank, 1992; Paranque, 1994a and 1994b; Paranque, 1997; Cieply and Paranque, 1996; Demartini and Kremp, 1997), which tends to indicate the existence of divergent conditions concerning corporate finance. The fact that Germany shows a negative correlation between size and financial debt is not explained by Rajan and Zingales. They consider the results for German firms to be atypical. In fact, those results are consistent with Bundesbankss analyses (1992) which show that a negative correlation between size and financial debt clearly exists in Germany. A much more sophisticated approach towards a reliable comparison of capital structures can be found in the study of the European Committee of Balance Sheet Data Offices (Delbreil et al., 1997). This is the only study which undertakes considerable efforts to compile comparable representative samples and to harmonize the indicators used. The results - 15 -

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 summing 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 perceptibly 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: 7KH VDPSOHV FRPSDUHG VKRXOG EH UHSUHVHQWDWLYH As has been demonstrated by the overview of the empirical capital structure comparisons, 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, - 16 -

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, possessing special favourable conditions due to their access to financial markets. Furthermore, only large samples not limited to very large listed corporations can allow an analysis of the size effect on financial debt. 7KH VDPSOH SRSXODWLRQV VKRXOG EH KRPRJHQHRXV 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. 7KH HPSLULFDO DSSURDFK VKRXOG EH PRUH FRPSUHKHQVLYH 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 requirements and the related asset-specific patterns of corporate finance. 7KH LQGLFDWRUV XVHG VKRXOG EH KDUPRQL]HG Assessing and ensuring the comparability of the indicators used is a necessary precondition for reliable research results. This lack of homogeneity with respect to the indicators used distorts the results of many international studies. In such cases no clear conclusions can be drawn from the results as they are massively affected by differences in national accounting methods and in the structure and organization of national production systems. Bearing in mind the considerable difficulties caused by these methodological and statistical 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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7DEOH  6HOHFWHG FRPSDUDWLYH UHVHDUFK UHVXOWV RQ FRUSRUDWH ILQDQFH VWXGLHV VLQFH 
Title Borio, C. E. V. (1990): Financial debt and financing of non-financial companies: an international perspective Databases and countries OECD financial statistics and national fund flow statistics. United States, Canada, United Kingdom, Japan, Germany, France, Italy. BACH (old version) and Global Vantage Data; France, Germany, Japan, United Kingdom, United States (Italy, Netherlands, Australia). Debt/assets. Indicators a) Debt (gross)/total assets; b) Debt (net)/real assets. Period, scope and size 1970-1987; All industrial or commercial companies and manufacturing industry; Representative national samples. 1982-1987 and 1983, 1987; All companies; Representative national samples and limitation of corporations listed on the stock market to a small number: between 16 companies (France) and 31 (Germany). 1985-1991; Manufacturing industry; Representative national samples. Main results According to indicator (a) financial debt higher in France than in Germany; according to (b) the reverse is true and Italy similar to Germany. Financial debt higher in France than in Germany and Italy; Italy more leveraged than Germany. Global Vantage results data confirm this observation but show greater differences between France and Germany. If provisions are included in net equity, France shows higher financial debt than Germany, otherwise, financial debt higher in Germany.

Remolona, E. M. (1990): Understanding international differences in financial debt trends

Bloch, L./Laudy, J. (1993): France, Allemagne et Belgique: des structures de bilans proches la fin de la dcennie quatre-vingt

BACH (old version);

France, Germany and Belgium. Deutsche Bundesbank (1994): Comparison of the provision of business enterprises in selected EC countries with own funds BACH (old version) and national sources;

a) Net equity (+provisions)/balance sheet total; b) Net equity (+provisions)/fixed assets (historical costs and market value). Net equity/balance sheet total.

1982-1991; Manufacturing industry; National samples.

Germany, France, Spain, Italy. Rajan, R.G./Zingales, L. (1995): What do we know about capital structure? Some evidence from international data Global Vantage Data; a) Debt+provisions/total assets; b) Debt/total assets; c) Debt/total net assets; d) Debt/debt+net equity (median and mean values) (historical costs and market value). a) Financial debt/total assets; b) Financial debt+provisions/GDP; c) Financial debt/GDP; d) Net equity/GDP, (market value). 1987-1990; All companies; Limitation to corporations quoted on the stock market, ranging from 118 companies (Italy) to 225 (France).

If no correction is applied for methodological differences between samples and for data processing, German firms are less financially autonomous than those in other countries; after correction, situation similar. According to (a) financial debt highest in Germany (historical costs), and Italy and France very similar; according to (b) (c) and (d), Italy more leveraged than France and Germany less than France (positive correlation between size and financial debt with the exception of Germany). According to (a) financial debt higher in Germany than in France; according to the other indicators Italy has the least financial debt and Germany the most; financial autonomy greatest in France.

United States, Japan, Germany, France, Italy, United Kingdom, Canada.

Kneeshaw, J.T. (1995): A survey of non-financial sector balance sheets in industrialised countries

National sources: INSEE for France, Statistisches Bundesamt for Germany, OECD and Banca d'Italia for Italy, OECD and Banco de Espaa for Spain; Australia, Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Spain, Sweden, Switzerland, United Kingdom, United States. Balance Sheet Office; Germany, Austria, Spain, France, Italy.

1992; All non-financial companies; National samples and macroeconomic data.

Delbreil, M, et al.(1997: Equity of European industrial corporations

Net equity/financial resources.

1990-1993 (checked for 1995); Manufacturing industry.

Least financial debt in France and Spain; Germany more leveraged on median values, less on aggregate data; Austria ranked between these positions; Least favourable position in Italy. More use of internal finance in USA, UK and from 1985 to 1989, Germany; More use of equity issues in the United Kingdom and United States; Bank debt higher in Japan, lower in Germany. In 1994, credit/GDP higher in Germany and Italy, lower in France, very low in United Kingdom; 1987-1992, long-term debt higher in Germany, lower in Italy, UK; short-term debt higher in UK, lower in France.

Corbett, J./Jenkinson, T. (1996): The financing of industry, 1970-1989: an international comparison

Aggregate corporate data processed on the basis of the national accounting standards in each country; Germany, Japan, United States, United Kingdom.

Net resource flows.

1970-1989.

Nayman, L. (1996): Les structures de financement des entreprises en Europe

OECD and BACH; Germany, France, Italy and the United Kingdom.

a) Credit/GDP; b) Balance sheet structure; c) Profitability; d) Resource percentage.

1987-1993; Non-financial companies.

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 7KH LQVWLWXWLRQDOLVW DSSURDFK FRUSRUDWH ILQDQFH IURP WKH SHUVSHFWLYH RI RUJDQL]DWLRQDO WKHRU\ DQG WKH WKHRU\ RI FRQYHQWLRQV 3
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 (SHFNLQJ RUGHU DSSURDFK) 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 (FRUSRUDWH ZHDOWK). 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 regularities 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 preferred patterns 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 in conjunction 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 research team.

- 19 -

 2UJDQL]DWLRQ DQG FRQYHQWLRQ 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 (tOHDUQLQJ E\ GRLQJ DQG E\ 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, complementary 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, provided it 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 requirements, 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\ ILQDQFLDO LQVWUXPHQWVt). 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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company will reflect its production structure and the nature of its investment policy. Nevertheless, this type of approach tends to ignore the specific features of the financing of operations. The organizational approach to company finance is another focus of contemporary research. Implicit skills are deemed to constitute assets: specialist resources can be a source of business goodwill. Business goodwill, which is deduced from the positive differential observed over several years between the value of the firm compared with its average return on capital, accounts for intangible assets not directly quantifiable but nevertheless productive of profit. The light shed on corporate finance by recent theories of the firm demonstrates the advantages of distinguishing between assets corresponding to specialised resources, on the one hand, and assets dedicated to specific demand, on the other. The differences relate most notably to the time horizons for the locking-up of capital and the management of the workforce, such that the determinant ratios for profitability and the constraints governing it will vary according to the nature of the assets. However, it is possible to arrive at a different analysis of these patterns. Corporate managerss preference for self-financing rather than for borrowing may be interpreted by reference to financing conventions. It will be remembered that the purpose of such conventions, like all contracts and agreements, is to deal with the uncertainty inherent in the financing relationship in a manner judged to be acceptable and effective by the parties concerned (Rivaud-Danset, 1995). This approach is founded on two main hypotheses which contest those of the neoclassical approach: the non-fulfilment of agents, following Simon (1976) for whom agents are rational, but only to a limited extent because of their limited cognition capacities, the uncertainty in which the agents conduct their activities, in particular their anticipations, following Knight (1921) and Rivaud-Danset (1995, 1996). It involves focusing on the following issues, in particular: The problem of the compatibility of the respective goals of the managers, the shareholders and the banks: conventions allow the players to co-ordinate and thereby to define organizational choices and the possible scope for action. The nature of the uncertainty with which the players must cope in their particular situation: financing conventions, that is to say arrangements of mutual trust which must

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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 involved. 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 resources 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 financial 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 real determinants, 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 coordination to reduce uncertainty in order to be able to plan their decisions. To sum up, according 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 - 23 -

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 productmarket 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 understand the basic constitutional principles of each national corporate finance system in order to explain the existing cross-country divergencies in capital structures.  7KH UHODWLRQVKLS EHWZHHQ EDQNV DQG FRPSDQLHV 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 RivaudDanset and Salais (1993) in defining two types of relationship according to the nature of the 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? %R[  3URFHGXUHEDVHG EDQNLQJ DQG FRPPLWPHQWEDVHG EDQNLQJ
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V QHHGV DUH 7KLV GLDORJXH DOORZV WKH EDQN WR JDLQ DFFHVV WR LQIRUPDWLRQ FRQVLGHUHG WR EH FRQILGHQWLDO 3HUVRQDOLVHG DQG WKHUHIRUH GLYHUVH SURFHGXUHV DUH LQYROYHG IRU WKH DFTXLVLWLRQ DQG SURFHVVLQJ RI LQIRUPDWLRQ 7KH TXDQWLW\ RI GDWD SURYLGHG LV OHVV LPSRUWDQW WKDQ WKH FDSDFLW\ IRU SURFHVVLQJ LW VSHFLDOLVHG H[SHUWLVH QHFHVVDULO\ DFTXLUHG RYHU WLPH DQG WKH HVWDEOLVKPHQW RI DQ LQGLYLGXDOLVHG UHODWLRQVKLS DOO RI ZKLFK HQDEOH WKH EDQN WR JHW WR NQRZ LWV FXVWRPHU ,Q WKH RWKHU GLUHFWLRQ WKH H[SHUW FDSDELOLW\ DFTXLUHG E\ WKH EDQN DQG WKH EXLOGLQJ RI D FORVH UHODWLRQVKLS JXDUDQWHH WKH FRPSDQ\ D TXDOLW\ RI LQIRUPDWLRQ ZKLFK LW ZRXOG RWKHUZLVH KDYH GLIILFXOW\ LQ DFTXLULQJt (Rivaud-Danset and Salais, 1992)

 7KH FRQYHQWLRQV RI LQVROYHQF\ ODZ 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 prodebtor 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 - 25 -

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 creditorss 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 superpriority 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, employeess 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 of enterprises 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 creditorss rights provided by the national insolvency procedures.

- 26 -

 %LEOLRJUDSK\
Akerlof, G. (1970): The market of lemons: quality, uncertainty, and the market mechanism, Quarterly Journal of Economics, 84, pp. 488-500 Borio, C. (1996): Credit characteristics and monetary policy transmission mechanism in fourteen industrial countries: facts, conjectures and some econometric evidence, in Alders, K./Koedijk, K./Wionder, H. (eds.): Monetary policy in a converging Europe, Dordrecht, pp. 77-116 Chanel-Reynaud, G. (1995): Impact de la rforme financire sur lsappareil productif franais, rforme financire et transformation des entreprises (Collectif), Rhne-Alpes Programme, Recherche en Sciences Humaines, 30, pp. 1-25 Cieply, S./Paranque, B. (1996): Comportement dsendettement des entreprises industrielles franaises sur la priode 1990-1993: apports et limites dsune approche en termes de taille, Observatoire des entreprises, Banque de France, T 96/02 Clerc, D. (1998): Lseconomie des conventions, Problmes Economiques, 2550, pp. 13-16 Coase, R. H. (1987): La nature de la firme , Revue Franaise dsconomie, 2, pp. 133-157, 162-163 Cobbaut, R. (1996): Thorie financire, Paris Cohen, E. (1994): Analyse financire, 3rd edition, Paris Corbett, J./Jenkinson, T. (1996): The financing of industry, 1970-1989: an international comparison, Journal of the Japanese and International Economies, 10, pp. 71-96 Coriat, B./Weinstein, O. (1995): Les nouvelles thories de lsentreprise, Paris Davis, E. P. (1995): Banking, corporate finance and monetary policy: an empirical perspective, Oxford Review of Economic Policy, 10, pp. 49-67 Demartini, A./Kremp, E. (1998): Structure du passif des entreprises industrielles de 1988 1996, Observatoire des entreprises, Banque de France, mimeo, Paris

- 27 -

Deming-Kunt A./Maksimovic V. (1996): Financial constraints, uses of funds and firm growth. An international comparison, World Bank, Policy Research Working Paper 1671 Deutsche Bundesbank (1992): Longer-term trends in the financing patterns of west German enterprises, Monthly Report, October, pp. 25-29 Deutsche Bundesbank (1994): Comparison of the provision of business enterprises in selected EC countries with own funds, Monthly Report, October, pp. 73-86 Dosi, G./Teece, D. J./Winter, S. G. (1990): Les frontires des entreprises: vers une thorie de la cohrence de la grande entreprise, Revue dsconomie Industrielle, pp. 238-257 Goux, J. F. (1995): conomie Montaire et Financire, Paris Goyer, M. (1995): Corporate finance, banking institutional structure and economic performance: a theoretical framework, MIT Working Paper Harris, M./Raviv, A. (1991): The theory of capital structure, Journal of Finance, 46, pp. 297-355 Hicks, J. (1975): The crisis in Keynesian economics, Oxford Hyafil, A. (1991): Structures financires: des thories distinctes, des choix qui convergent, Revue Franaise de Gestion, pp. 175-190 Jensen, M. C./Meckling, W. H. (1976): The theory of the firm: managerial behaviour, agency costs and ownership structure, The Journal of Financial Economics, 3, pp. 305-360 Kneeshaw, J. T. (1995): A survey of non financial sector balance sheets in industrialised countries, Bank for International Settlements, Working Paper no. 25, Basle Knight, F. (1921): Risk, uncertainty and profit, Boston/New York Leland, H./Pyle, D. (1977): Informational asymmetries, financial structure and financial intermediation, Journal of Finance, 32, pp. 371-387 Modigliani, F./Miller, M. H. (1958): The cost of capital, corporate finance, and the theory of investment, American Economic Review, 48, pp. 261-275

- 28 -

Myers, S. C. (1977): Determinants Economics, 9, pp. 147-175

of

corporate

borrowing,

Journal

of

Financial

Myers, S. C. (1984): The capital structure puzzle, Journal of Finance, 39, pp. 575-592 Myers, S. C./Majluf, N. (1984): Corporate financing and investment decisions when firms have information that investors do not have, Journal of Financial Economics, 13, pp. 187221 Nayman, L. (1996): Les structures de financement des entreprises en Europe, conomie Internationale, 66, pp. 161-182 Paranque, B. (1994a): Fonds propres, rentabilit et efficacit chez les PME, Revue dsconomie Industrielle, 67 Paranque, B. (1994b): Les PME sont-elles handicapes par leur dynamisme?, Bulletin de la Banque de France, Studies Supplement, pp. 147-162 Paranque, B./Rivaud-Danset, D./Salais R. (1996): Marchs, organisations de la production et rentabilit des entreprises industrielles, Banque de France, T96/03 Paranque, B. (1997): Financial constraints and economic behaviour: the specificities of small firms from 1985 to 1995, Corporate Finance and Organizations, electronic document Rajan, R. G./Zingales, L. (1995): What do we know about capital structure? Some evidence from international data, Journal of Finance, 50, 1421-1460 Remonola, E. M. (1990): Understanding international differences in financial debt trends, Federal Reserve Bank of New York, Quarterly Review, 15, pp. 31-42 Revue Economique (1989): Marchs internes, marchs externes, 40 Rivaud-Danset, D. (1995): Le rationnement du crdit et lsincertitude, Revue dsconomie Politique, 105, pp. 223-247 Rivaud-Danset, D. (1996): Les contrats de crdit dans une relation de long-terme, Revue conomique, 4, pp. 937-962

- 29 -

Rivaud-Danset, D./Dubocage, E./Salais, R. (1998): Comparison between the financial structure of SME versus large enterprise using the BACH databank, CNRS-UMR 604Institutions et Dynamiques Historiques de lsEconomie, Paris Rivaud-Danset, D./Salais, R. (1992): Les conventions de financement. approches thorique et empirique, Revue Franaise dsconomie, 7, pp. 81-120 Premires

Ross, S. (1977): The determination of financial structure: the incentive signalling approach, Bell Journal of Economics, 8, pp. 23-40 Salais, R. (1994): Les institutions de march: le regard dsun conomiste, Revue du Nord, 307, pp. 701-710 Salais, R./Storper, M. (1993): Les mondes de production, Paris Schumpeter, J. (1935): Thorie de lsvolution conomique, French edition, Paris Simon, H. A. (1976): From substantive to procedural rationality, in: Lastis (ed.): Methods and appraisals in economics, Cambridge, pp.129-148 Spence, M. (1974): Competitive and optimal response to signals: An analysis of efficiency and distribution, Journal of Economic Theory, 7, pp. 296-332 Stiglitz, J. E./Weiss, A.(1981): Credit rationing in markets with imperfect competition, American Economic Review, 71, pp. 393-410 von Thadden, E. L. (1992): The commitment of finance, duplicated monitoring and the investment horizon, Working Paper, Centre for Economic Policy Research, London Warner, J. B. (1977): Bankruptcy, absolute priority and the pricing of risky debt claims, Journal of Financial Economics, 5, pp. 239-276 Williamson, O. E. (1975): Markets and hierarchies, New York Williamson, O. E. (1985): The economic institutions of capitalism, New York Williamson, O. E. (1986): Economic organization, firms, market and policy control, Brighton

- 30 -

Williamson, O. E. (1988): Corporate finance and corporate governance, Journal of Finance, 43, pp. 567-591 Wood, P. R. (1995): Principles of international insolvency, London

- 31 -

- 32 -

&+$37(5 

7KH DQQXDO DFFRXQWV GDWDEDVHV RQ QRQILQDQFLDO HQWHUSULVHV RI WKH %DQTXH GH )UDQFH DQG WKH 'HXWVFKH %XQGHVEDQN PHWKRGRORJLFDO DVSHFWV DQG FRPSDUDELOLW\

E\ +DQV )ULGHULFKV DQG $QQLH 6DXYp

- 33 -

 2ULJLQV DQG VSHFLDO IHDWXUHV RI WKH GDWDEDVHV RI WKH %DQTXH GH )UDQFH DQG WKH 'HXWVFKH %XQGHVEDQN
 %DQTXH GH )UDQFH The Banque de France has at its disposal two different databases which provide information on the annual accounts of non-financial enterprises in France: the FIBEN database (tFichier Bancaire des Entreprisest) and the Balance Sheet Office database (tFichier Centrale des Bilanst). These bases differ largely with respect to the volume of information collected as well as the purposes for which they are used. While FIBEN comprises a nearly exhaustive collection of annual accounts of French incorporated companies, based on the legally prescribed tax forms, the CdB base covers only 20 % of the base material of FIBEN, but the information provided goes far beyond the standard tax balance sheet, as several additional forms have to be filled in by the enterprises included in this sample. The comprehensiveness of the information available in the tfichier CdBt makes that base particularly attractive for research purposes.  7KH ),%(1 GDWDEDVH Nearly 200,000 firms from all economic sectors send their corporate tax returns (balance sheets, income statements and additional information on tangible and intangible fixed assets and depreciation) to the branch network of the Banque de France. More than 200 branches collect this accounting data in order to build up the FIBEN database. The information provided by FIBEN includes about 60 % of all joint-stock companies and 65 % of all private limited companies. Initially, the information was collected in order to gauge the quality of bills of exchange offered to the central bank for discount. The information was useful for the central bankss monetary policy in periods when the rediscount credit was a major monetary policy instrument in France. Rediscount operations were discontinued in 1971, but the central bank continued to gather specific data on firms. In 1976, the central bank started computerising the files and created the FIBEN database, which has been accessible to all banks since 1982. Before granting a credit to a firm, the commercial bank checks its creditworthiness in the FIBEN database. The FIBEN data-set comprises different kinds of information (descriptive data from 2,320,000 firms, 1,500,000 managers, 190,000 annual balance sheets, 495,000 judicial incidents, 18,000 court-ordered bans). This data-set supplies valuable information for conducting monetary policy. The refinancing process is currently based on underlying assets eligible for monetary policy operations and, in - 34 -

particular, on commercial paper issued by companies with the rating t3t, which indicates a sound financial position. This rating is given by the Banque de France. Consequently, FIBEN contains specific information regarding firms, such as: current balance sheets, outstanding bank debt, bank relationships, payment defaults, risk rating of firms. The assessment of a firm is reflected in a ranking which indicates the short to medium-term solvency of companies according to the Banque de Francess own risk evaluation methods. This methodology uses various sources of information: accounting data (parent company and consolidated accounts), qualitative information (such as whether the company is part of a group, the quality of its environment, etc.), banking risk declarations, statements of payment incidents and information regarding its legal representatives. Companies that meet one or more of the following criteria are given a rating: a certain level of activity (turnover of more than FRF 5 million), capital, etc., companies benefiting from bank loans reported by credit institutions to the Banque de France Central Credit Register Unit, businesses giving cause for concern owing to their financial situation, their ability to meet commitments or the assessment made of their management. The tcompaniest units of Banque de France branches collect the data necessary for awarding ratings at source. But there is no automatic rating; on the contrary, a firmss creditworthiness is re-examined each time significant new information is brought to the attention of the Banque de France. In the absence of any such elements, ratings are systematically updated on a periodic basis.

- 35 -

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.  7KH 7XUQRYHU 5DWLQJ It indicates the level of turnover according to the table below:
A B C D E F G H J N turnover equal to or greater than FRF 5 billion turnover between turnover between turnover between turnover between turnover between turnover between turnover between turnover less than FRF 1 billion and FRF 5 billion FRF 500 million and FRF 1 billion FRF 200 million and FRF 500 million FRF 100 million and FRF 200 million FRF 50 million and FRF 100 million FRF 10 million and FRF 50 million FRF 5 million and FRF 10 million FRF 5 million

non-significant turnover (holding companies that do not publish consolidated accounts, firms that do not directly carry on an industrial or commercial activity or whose activity cannot be measured by turnover).

turnover not available or out of date (accounting year ended more than 21 months ago)

 7KH &UHGLW 5DWLQJ 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,

- 36 -

 a t5t credit rating is given to firms whose situation gives cause for concern owing to a significant deterioration in operating conditions, an imbalance in their financial situation, the recording of a significant amount of payment incidents, or the presence of persons holding office as legal representatives who give cause for concern, etc., a t6t credit rating is given to firms whose situation gives cause for grave concern linked to persistently poor results over the previous three years, the existence of a serious imbalance in their financial structures or events such as the loss of half of the share capital or legal proceedings, etc.  7KH 3D\PHQW 5DWLQJ The payment rating indicates the companyss ability to make payments on time. There are three payment ratings: a t7t payment rating indicates that in the course of the last six months, payments were made on time or reported incidents were of little importance and do not reflect real cash flow difficulties, an t8t payment rating indicates that the firmss cash flow difficulties do not seem to call its creditworthiness seriously into question, a t9t payment rating applies when reported payment incidents denote serious cash flow difficulties and cast grave doubts on the firms solvency.  0DQDJHPHQW 5DWLQJ In order to make a comprehensive judgement of a company, it is also useful to take into account the information available on its management: presence in other companies with the office of legal representative or as a partner, legal proceedings or decisions of commercial nature, etc.. The tBanque de France ratingt given to natural persons exercising a management function, excluding all sole proprietors, is expressed by the figure 000, 040, 050 or 060: Rating t000t: the information collected by the Banque de France on the manager gives no cause for concern.

- 37 -

 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 of t9t. 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 decision of 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 - 38 -

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.

- 39 -

7DEOH  5HSUHVHQWDWLYHQHVV RI WKH &G% GDWDEDVH LQ 

6HFWRUVVL]H
6BSD8VGUVS@ APS@TUS`ADTCDIB

0 - 19 employees
Number of companies Number of employees Coverage rate*

20 - 499 employees
Number of companies Number of employees Coverage rate*

500 and more employees

Number of companies Number of employees Coverage rate* Number of companies

Total
Number of employees Coverage rate*

Sample INSEE national database

6BSD8VGUVS6G6I9 APP9DI9VTUS`

69 5,116

698 27,658

2.5

141 828

9,761 39,157

24.9

2 7

1392 16,085

8.7

212 5,951

11,851 82,900

14.3

Sample INSEE national database

8PITVH@SBPP9T DI9VTUS`

598 7,791

6,747 52,524

12.8

1,451 3,355

132,116 244,188

54.1

103 134

124,508 152,456

81.7

2,152 11,280

263,371 449,168

58.6

Sample INSEE national database

6VUPHP7DG@ DI9VTUS`

748 17,394

8,993 93,685

9.6

2,349 5,527

207,554 390,057

53.2

140 176

161,130 209,241

77.0

3,237 23,097

377,677 692,983

54.5

Sample INSEE national database

86QDU6GBPP9T DI9VTUS`

42 721

545 5,415

10.1

242 471

30,418 44,722

68.0

49 65

213,561 245,504

87.0

333 1,257

244,524 295,641

82.7

Sample INSEE national database

DIU@SH@9D6U@BPP9T DI9VTUS`

732 12,207

9,341 85,287

11.0

2,383 5,080

200,572 342,134

58.6

164 210

285,158 378,475

75.3

3,279 17,497

495,071 805,896

61.4

Sample INSEE national database

H6IVA68UVSDIB DI9VTUS`

1,556 20,565

19,434 150,428

12.9

5,507 11,071

469,580 785,279

59.8

261 352

390,982 495,355

78.9

7,324 31,988

879,996 1,431,062

61.5

Sample INSEE national database

@I@SB`

3,676 58,678 15 705 877 37,378 5,711 137,723 352 16,042

45,060 387,339 158 1,595 11,150 247,693 58,071 653,947 4,197 94,600

11.6

11,932 25,504 53 218 2,743 9,026 5,754 18,459 1,148 5,049

1,040,240 1,806,380 7,147 22,745 175,310 445,029 359,937 965,681 95,498 321,335

57.6

717 937 26 42 79 120 169 294 54 102

1,175,339 1,481,031 183,000 228,859 113,833 176,138 367,631 564,281 296,031 396,569

79.4

16,325 85,119 94 965 3,699 46,524 11,634 156,476 1,554 21,193

2,260,639 3,674,750 190,305 253,199 300,293 868,860 785,639 2,183,909 395,726 812,504

61.5

Sample INSEE national database

8PITUSV8UDPI

9.9

31.4

80.0

75.2

Sample INSEE national database

US69@

4.5

39.4

64.6

34.6

Sample INSEE national database

US6ITQPSU6UDPI

8.9

37.3

65.2

36.0

Sample INSEE national database

S@6G@TU6U@ S@IUDIB6I9 7VTDI@TT68DWDUD@T

4.4

29.7

74.6

48.7

Sample INSEE national database

8PSQPS6U@T@SWD8@T

87 60,121 750 78,863

561 63,723 7,206 271,279

0.9

25 1,222 1,051 10,300

1,831 90,190 100,826 677,150

2.0

1 23 110 346

627 18,191 342,930 1,076,008

3.4

113 61,366 1,911 89,509

3,019 172,104 450,962 2,024,437

1.8

Sample INSEE national database

T@SWD8@TUP CPVT@CPG9T

2.7

14.9

31.9

22.3

Sample INSEE national database

@9V86UDPIC@6GUC TP8D6GT@SWD8@T

132 37,109

1,591 188,854

0.8

194 4,228

12,025 199,457

6.0

13 80

41,584 148,533

28.0

339 41,417

55,200 536,844

10.3

Sample INSEE national database

UPU6G

25 6,154

347 39,662

0.9

364 2,584 23,405 77,418

44,620 172,003 1,847,195 4,739,127

25.9

3 13 1,174 1,964

1,801 10,124 2,524,168 4,115,819

17.8

392 8,751

46,768 221,789

21.1

Sample INSEE national database

11,694 129,039 437,889 1,976,350

6.5

39.0

61.3

36,273 4,500,402 517,271 10,831,296

41.6

* Coverage rates calculated in terms of employees.

- 40 -

 'HXWVFKH %XQGHVEDQN The corporate balance sheet statistics of the Deutsche Bundesbank (BBk) constitute the most comprehensive evaluation of annual accounts of non-financial enterprises in Germany and the only available statistical presentation of the corporate sector in western Germany. The collection of financial statements of enterprises at the Deutsche Bundesbank originates from the legally prescribed functions of performing credit assessments. Pursuant to section 19 of the Bundesbank Act, the Bundesbank, within the scope of its rediscount operations with credit institutions, is only permitted to purchase or lend bills of exchange backed by three parties which are known to be solvent. The Bundesbank has traditionally regarded this legal provision as a mandate to conduct a comprehensive review of the credit standing of the companies involved in rediscount transactions. To facilitate the essential analytical basis for the required evaluation of their solvency, the enterprises concerned are requested to submit their annual accounts (on a strictly confidential basis) to the branch offices of Land Central Banks (Bundesbank regional offices) where they are recorded on a PC which automatically checks for logical errors and missing data. They are transmitted via telecommunication to the Statistics Department at the Bundesbankss Central Office where, following additional plausibility and consistency checks and a correction of errors, they are stored in the Bundesbankss corporate balance sheet database. This information subsequently provides, on the one hand, the source material for the Bundesbankss Credit Department, which uses it for its quantitative credit risk assessment based LQWHU DOLD on discriminant analysis. On the other hand, it constitutes the base material from which the Bundesbankss corporate balance sheet statistics are compiled by means of expansion by ratio estimate in order to obtain a more representative presentation of the corporate sector. Every year more than 70,000 annual accounts are collected by the Bundesbankss branch offices, mainly covering the sectors energy and water, mining, manufacturing, construction, wholesale/retail trade and transport, of which approximately 15,000 have to be excluded. These are either consolidated accounts or financial statements for incomplete financial years or balance sheets of firms in those sectors in which - owing to the small number of accounts available - no meaningful results can be produced, as is the case for agriculture and most of the branches of the service sector. Although the base material of roughly 55,000 annual accounts represents only 4 % of the total number of enterprises, 60 % of the total turnover of the west German corporate sector is covered by the Bundesbank sample. For manufacturing, the coverage ratio is even better (75 %). The Bundesbankss base material for the eastern part of Germany (called the new Lnder) is not nearly as extensive as it is for western Germany, owing to a lower level of acceptance of the bill of exchange as a financing instrument by east German corporations. Compared - 41 -

with the situation in the west German enterprise sector, the coverage of the Bundesbankss base material for eastern Germany is very small. With approximately 4,000 annual accounts, it represents only 25 % of the total turnover of the tax statistics. This sample is far too small to permit representative calculations of the enterprise sectorss financial situation in the new Lnder. The base material for west German enterprises varies greatly in the coverage of different sectors, size classes, and legal forms owing to the Bundesbankss access to balance sheets through its rediscount business. This results from the fact that the importance of the trade bill as a means of financing varies according to the kind of business activity and the related financing practices. While the coverage ratios within sectors vary from 25 % to 70 %, the discrepancies in terms of size class are even larger. Small enterprises (less than DM 10 million) are largely underrepresented, with only 8 % of their total turnover being covered. In the area of large enterprises with a turnover of more than DM 100 million, by contrast, the Bundesbankss database comes close to an overall survey (coverage ratio of nearly 80 %). The poor representation of small and medium-sized companies in the west German samples is put into perspective by the fact that the Bundesbank is the only institution which attempts a systematic coverage of the total enterprise sector, including firms in the legal form of sole proprietorships and partnerships: businesses which are especially vulnerable financially, but very important in terms of employment (more than 50 % of the west German industrial workforce is employed by this type of enterprise) and which, according to the new European ESA standards, will count partly towards the household sector. Although more than 50 % of the base material consists of financial statements of incorporated enterprises, i. e. businesses which are required by accounting law to compile commercial balance sheets, 90 % of the material is submitted in the form of tax balance sheets. These are based on the legal prescriptions of tax law, which differ significantly from commercial law, as far as specific items are concerned (e.g. provisions), despite the authoritative principle and its reverse concept (tMassgeblichkeit und umgekehrte Massgeblichkeitt). In addition, the presentation of the financial statements for tax purposes is less detailed and less standardised than in the case of commercial balance sheets. The analytical possibilities are considerably reduced by this problem, as not all the sub-items of the standard accounting layout are available, and the differences in disclosure and valuation have to be borne in mind when the results are interpreted.

- 42 -

7DEOH  5HSUHVHQWDWLYHQHVV RI WKH EDODQFH VKHHW VWDWLVWLFV EDVH PDWHULDO LQ 

west Germany Number of enterprises Balance sheet statistics
Dr

east Germany

Germany

Turnover Balance sheet statistics Turnover tax statistics Degree of coverage of the balance sheets statistics
% 56.6 59.2 25.7

Turnover tax statistics

Number


Turnover (DM billion) 3,076.0 5,438.3

6yyrrvr

60,047

1,510,964

@pvprp

Manufacturing Construction Trade Others

Tvrpyh

24,352 5,683 27,313 2,699

300,493 297,805 777,477 135,189

1,616.4 114.2 1,098.4 251.0

2,256.2 495.5 2,177.6 509.0

71.5 23.0 50.4 49.3

72.9 26.3 52.4 52.2

40.3 11.4 24.8 29.5

(turnover)

less than DM 10 million DM 10 million to less than DM 100 million DM 100 million and more
Grthys

32,186 23,873

1,457,856 47,931

133.3 712.0

1,286.1 1,246.8

10.4 57.1

11.2 59.3

6.3 36.3

3,988

5,177

2,230.7

2,905.4

76.8

77.5

55.6

Public stock corporations Limited liability companies Partnerships Sole proprietorships Others

800 31,026 15,990 9,505 772

1,292 263,539 148,012 958,648 13,815

947.3 1,207.2 742.3 58.3 61.7

1,189.5 1,679.4 1,545.4 660.1 177.6

79.6 71.9 48.0 8.8 34.7

(1) Mining, quarrying and extraction of stones and earths, manufacturing, construction, wholesale/retail trade and transport

As the origins of the data collection lie in lending business, the base material for the compilation of the annual accounts statistics is based neither on a complete survey nor on a sample collected using methods of sampling theory. On the contrary, the data represent an annually changing selection of firms using the bill of exchange as a financing instrument. The crucial question of whether the Bundesbankss base material represents a positively biased sample of firms, an assumption which has been expressed occasionally by researchers, cannot be clearly confirmed. It is true that the balance sheets submitted are preselected by the rediscounting credit institutions in the process of assessing the credit standing of the other parties to the bill and that the Bundesbank itself eliminates very small enterprises, because a comprehensive credit assessment is made only if the bill commitment exceeds a certain minimum limit. But comparisons with insolvency statistics demonstrate that the bankruptcy ratios in the base material for the sectors under review are quite similar to those reported by statistics. According to recent investigations, the enterprises recorded by the Bundesbank do not seem to be particularly profitable and viable, a conclusion which could be explained at least partly by the fact that, besides the - 43 -

balance sheets of the actual customer of the bill, the annual accounts of the other liable party are also requested, businesses on which the rediscounting bank often has no direct information (see for the whole section Deutsche Bundesbank, 1998).

 &RQVWUXFWLRQ RI WKH VDPSOHV

The following analysis of the financial structure of enterprises is based on the analysis of the stock figures of individual balance sheets of manufacturing corporations. An approach based on flow figures, similar to the very recent empirical approaches to the corporate finance issue taken by Corbett and Jenkinson (1996), Nayman (1996), as well as Deming-Kunt and Maksimovic (1996) was not pursued, as the available annual accounts of German corporations do not provide a flow of funds statement. An indirect calculation of sources and uses of funds was not envisaged, as such an approach would have increased the related problems of data harmonization. Therefore, the study concentrates - as far as &KDSWHU  is concerned - on an examination in terms of balance sheet structures. As far as the time period under review is concerned, the study concentrates on the period 1987 to 1995 and 1987 to 1996, respectively, in order to completely cover the last business cycle, which occurred relatively synchronously in both countries at the end of the eighties and the beginning of the nineties. The Banque de France was also able to provide figures for 1996, owing to the fact that the companies in the CdB base submit their annual accounts earlier than is the case for the Bundesbank. The year 1987 seemed to be especially appropriate as a starting point as in that year the Fourth EC Directive was translated into German accounting legislation (5 years later than in France). The minimum harmonization of the accounting regulations thus achieved provides the necessary framework for the development of a common harmonized presentation of the balance sheets of the corporations in both countries, as described in the second part of this chapter. The individual annual accounts included in the samples were restricted to corporations in the manufacturing sector. This choice was based primarily on the consideration that these branches constitute the core of the industrial sector in both countries and that they tend to be more homogeneous with respect to their financing structures and customs than other sectors of the economy such as construction or wholesale/retail trade, in which specific national financing conventions and preferences clearly play a more important role. The sampling procedure exclusively considers public stock corporations and limited liability companies, and for Germany only businesses of the old Bundeslnder are included on account of the problem that the capital structure of east German corporations largely differs from that of the west German enterprises as a result of the specific accounting regulations - 44 -

applying to these firms and the transitional situation of the industrial sector in eastern Germany. As the CdB database of the BdF almost exclusively covers incorporated enterprises, it was necessary to restrict the analysis of enterprises organized in these legal forms with regard to the comparability of the results. This measure prevents the results from being massively distorted by a different composition of the national samples by legal form. But such a limitation seems to be reasonable from a methodological point of view, too, as for these types of enterprises a certain minimum harmonization of the accounting regulations has been achieved by the translation into national law of the Fourth EC Directive, a necessary precondition for the development of a common harmonized presentation of the balance sheets of the corporations in both countries. In addition, corporations which did not provide employee figures, and all businesses which reported annual account patterns that were completely untypical of production enterprises (turnover of zero, balance sheet total of zero or negative, and total indebtedness less than zero), had to be excluded from the samples. In order to overcome the specific limitations of the different sample compilation methods, two alternative sampling approaches were used to select the balance sheets from the national databases. First, a number of two-year sliding balanced samples were drawn from the base material, covering the period under review in overlapping sections. In addition, a nine-year balanced sample was built for the entire period from 1987 to 1995, comprising only those incorporated enterprises in manufacturing industries which continuously submitted their annual accounts to the respective institutions for the entire period considered and whose economic activity remained centred in the manufacturing sector. Such a twofold approach seemed to be appropriate not only from a methodological but also from a technical point of view. The entirely balanced sample largely reduces the technical problems of model specification within econometric panel analysis originating from changing sample populations in the base material, and it enables us to calculate lagged variables for longer periods, as all individual observations are available as time-series. By definition, continuously balanced samples systematically exclude the dynamic segment of the base material, for example newly created or disappearing firms and businesses in the process of being restructured. This affects the representativeness of the results and introduces a bias towards the more stable and viable enterprise population, a phenomenon commonly termed the tsurvivor biast. The extent of the survivor bias depends greatly on the length of the time-period considered. In general, it was demonstrated that this selection effect, all in all, augments disproportionaly only with the length of the period considered, but that the related reduction of available balance sheets is increasingly concentrated on the segment of smaller enterprises. This creates significant problems, as lower size classes generally represent an already systematically undercovered segment in balance sheet - 45 -

databases. Needless to say, such an artificially stabilised sample does seem to be less appropriate for economic studies, as the effective dynamics of the enterprise sector are systematically faded out. In addition, a correct analysis of the size-specific variations of corporate debt necessitates a sufficient sample size in the lower size classes as well. These problems were largely overcome by investigating overlapping sliding samples. Not only is the survivor bias largely eliminated, but the sample rotation bias, originating from the changing sample populations in the different years, is also substantially reduced (though not eliminated completely) by the partial balancing procedure. Nevertheless, a rough stabilisation of the database is achieved. The descriptive analysis is focused directly on analysing the sliding samples only (which are briefly described in the following section), while the different sample construction methods for the econometric analyses are outlined separately in &KDSWHU . Since the size of the companies has proved to be of particular importance in analysing corporate debt structures, as was clearly demonstrated by the study of own funds undertaken by the ECCB, the different samples were broken down by size on a very detailed classification scheme based on the number of employees. That kind of classification appears more appropriate for a long-term analysis than turnover-based size classes, as the classification variable is less affected by cyclical variations in business activity and inflation in the two countries. Five size classes have been defined: the smallest enterprise class 67(V: 1 - 19 employees, the small enterprise class 6(V: 20 - 99 employees, the medium-sized enterprise class 0(V: 100 - 499 employees, the large enterprise class /(V: 500 - 1,999 employees, the largest enterprise class /7(V: 2,000 employees and more. The size classification chosen for this study provides a fairly homogeneous size-related segmentation of the incorporated manufacturing sector for both France and Germany as the average firm size as measured by employee figures or turnover tends to be more or less similar, with the sole exception of the upper size class, in which German corporations are on average distinctly larger than their French counterparts. As 7DEOH  demonstrates, significant differences are noticeable between the two countries with respect to the weight of each size class in the samples. As regards the unbalanced datasets for west German manufacturing, the range of enterprises included mainly consists of small and medium- 46 -

sized firms (in our definition). More than 6,600 corporations were selected within the size categories from 20 to 499 employees, which account for more than 70 % of the total sample population. Approximately 10 % of the sample covers the segment of large companies (500 and more employees), and a considerable number of very small enterprises (1 to 19 employees) were available for the sample composition, which constitute roughly 20 % of the sample population. By contrast, the proportion of firms belonging to the two lowest size classes tends to be perceptibly larger in the samples of the Banque de France, while the two upper size classes record significantly lower frequencies than in the Bundesbankss samples. That could be seen as an indication that data collection via the lending business, as is the case for the Bundesbank, leads to a greater selectivity in terms of firm size. Owing to the lack of statistical information for Germany about the composition of the incorporated enterprise sector by employee-based size classes, it is not possible to prove precisely that the size structure of the samples would differ substantially from the size composition of the German incorporated manufacturing sector in the universe. Nevertheless, the French figures clearly indicate that the smallest enterprises are heavily underrepresented even in the French samples, as their coverage ratio only varies between 5 % and 10 %, depending on the indicator chosen (number of enterprises or employees), in contrast to more than 70 % for the largest companies. This implies that the results for the lowest size class have to be treated with caution. More definite statements as to the representativeness of the balanced and sliding samples for west Germany by major industrial groupings can be drawn from the information provided by the turnover tax statistics of the German Federal Statistical Office. Unfortunately, no detailed information was available for incorporated enterprises at the sector level, but only an overall figure for total manufacturing, so that the coverage measures for major industrial groupings had to be applied to the figures for both unincorporated and incorporated companies. As 7DEOH  shows, the representativeness of the sliding sample with regard to the total turnover of incorporated enterprises in west German manufacturing is very high. The 9,000 companies selected only account for roughly 13 % of the total population of incorporated enterprises in west German manufacturing but for more than 70 % of their total turnover if only these legal forms are regarded. As measured by the turnover figures for all manufacturing companies, irrespective of their legal form, it was demonstrated that the representativeness of intermediate and capital goods industries was perceptively higher than that of both durable and nondurable consumer goods industries. Compared with the representativeness of the Bundesbankss samples, the coverage ratios of the French samples are significantly higher, as far as the number of enterprises is concerned. But evaluations of representativeness based on the number of enterprises are - 47 -

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 

7DEOH  6L]H VWUXFWXUH RI WKH VOLGLQJ VDPSOHV

D )UDQFH Two-year sliding sample (1994/1995) Size class Number of corporations Total 14,476 1 - 19 Employees 20 - 99 Employees 100 - 499 Employees 500 - 1,999 Employees 2,000 and more Employees 3,125 7,901 2,772 577 101

Frequency 100.0 % 21.6 % 54.6 % 19.1 % 4.0 % 0.7 %

E *HUPDQ\ Two-year sliding sample (1993/1994) Size class Number of corporations Total 9,260 1 - 19 Employees 20 - 99 Employees 100 - 499 Employees 500 - 1,999 Employees 2,000 and more Employees 1,774 4,086 2,552 662 186

Frequency 100.0 % 19.2 % 44.1 % 27.6 % 7.1 % 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.

- 48 -

7DEOH  'HJUHH RI UHSUHVHQWDWLYHQHVV RI WKH VOLGLQJ VDPSOHV

D )UDQFH Two-year sliding sample (1994/1995) Reference: exhaustive survey of the INSEE Sliding sample in 1995 Size/sector Total 1-19 Employees 20-99 Employees 100-499 Employees 500-1,999 Employees 2,000 Employees and more Intermediate goods Capital goods Durable consumer goods Non-durable consumer goods Number of enNumber of terprises employees 14,476 2,064,506 3,125 7,901 2,772 577 101 6,419 3,195 626 4,236 38,813 357,178 572,919 523,664 571,932 832,698 630,061 84,323 517,424

Coverage b\ number of enterprises 16.7 % 5.2 % 38.3 % 58.7 % 70.8 % 71.1 % 19.4 % 16.8 % 12.9 % 14.4 % number of employees 56.0 % 9.8 % 42.3 % 59.7 % 71.7 % 75.8 % 56.1 % 61.8 % 50.6 % 51.0 %

E *HUPDQ\ Two-year sliding sample (1993/1994) Reference: exhaustive survey of the turnover tax statistics Sliding sample in 1994 Sector Total manufacturing RQO\ LQFRUSRUDWHG HQWHUSULVHV Total manufacturing DOO OHJDO IRUPV Intermediate goods Capital goods Durable consumer goods Non-durable consumer goods (9,260) 4,148 3,049 397 1,666 (1,012,298,728) 443,934,276 384,491,114 34,576,763 149,296,575 9,260 1,012,298,728 Number of enterprises Turnover (DM)

Coverage by number of enterprises turnover

12.9 %

71.4 %

3.7 % 4.5 % 6.2 % 2.0 % 1.8 %

50.8 % 56.7 % 59.8 % 37.5 % 31.4 %

- 49 -

 'LIIHUHQFHV LQ DFFRXQWLQJ UHJXODWLRQV DQG UHODWHG DGMXVWPHQW 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 definition 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 indicator concept, which basically follows the adjustment procedures taken in the BACH database but also goes a lot further. This approach is shown in the tables below. Needless to say, such an H[SRVW harmonization approach will never manage to remove all the existing accounting differences because sometimes the information available is not sufficiently detailed to allow differences in disclosure to be eliminated, while for differences in valuation, readjustment is mostly not possible at all owing to a complete lack of information on this issue. In view of the large amount of remaining accounting differences in the two countries, it was necessary to concentrate on the most important disclosure and valuation differences.1 A threefold classification of accounting problems was developed, according to the degree of harmonization achieved by the measures taken: $FFRXQWLQJ GLVFUHSDQFLHV ZKLFK KDYH EHHQ FRPSOHWHO\ HOLPLQDWHG. These are basically differences in the disclosure of assets and liabilities, which were readjusted by using supplementary information. The resulting impact of the adjustment step on the aggregated balance sheet structure is quantified by calculating the overall weighted mean based on the sliding sample 1993/94 for the year 1994.

1 The information on accounting differences was taken from: Deutsche Bundesbank (1994), Ordelheide and KPMG (1995), Kting and Weber (1994), KPMG (1995), Lefebvre (1995), Wietek and Chomiac de Sas (1990) and Perlewitz (1995).

- 50 -

 $YRLGDEOH DFFRXQWLQJ GLIIHUHQFHV The effects resulting from differences in disclosure as well as from the use of different valuation concepts were partly neutralised by switching to more aggregated items. ,QVROXEOH DFFRXQWLQJ GLVFUHSDQFLHV. This problem applies especially to valuation differences and substantially affects the interpretation of the cross-country comparisons.  $FFRXQWLQJ GLVFUHSDQFLHV ZKLFK KDYH EHHQ FRPSOHWHO\ HOLPLQDWHG  7KH GLVFORVXUH RI GHEWRUV DQG FUHGLWRUV DFFRUGLQJ WR WKH GHJUHH RI ILQDQFLDO LQWHJUDWLRQ The principal conceptual difference between the French and the German balance sheet data is to be found in the disclosure of debtors and creditors. While the French "Plan comptable general" (PCG) requires assets and liabilities to be disclosed according to the nature of the underlying transaction (financial transaction versus non-financial or commercial transaction), the German HGB ("Handelsgesetzbuch"), in accordance with the Fourth EC Directive, prescribes a classification according to the degree of financial integration in order to show the extent of economic dependency, which is regarded as a substantial improvement in the informational content of annual accounts. As the degree of integration constitutes the dominating classification criterion under the provisions of German accounting law, trade debtors or creditors2 to group and associated companies, for example, have to be set up under creditors and debtors to group and associated companies (and not under trade creditors or debtors), so that this position, which basically has a financial nature, constitutes a mix of financial and non-financial items. This significant difference clearly constitutes a major potential for overestimating the extent of trade debtors and creditors in France relative to Germany, a fact which has been neglected by many empirical studies. Owing to a lack of supplementary information on this issue in German accounts, the only option was to readjust the balance sheet data of French companies. In order to achieve an identical disclosure of the respective items, the components of: trade debtors and trade creditors, other debtors and other creditors, other financial creditors, and conditional loans and advances
2 It should be noted that creditors relate to the liabilities side (payables) and debtors to the assets side (receivables) of the balance sheet.

- 51 -

relating to groups and associated companies were isolated and reclassified into the respective items of debtors and creditors to group and associated companies, which appear in the harmonized layout as one single position, owing to the fact that the further differentiation between participations, associates and affiliated companies, which is available for the German data, had to be suppressed. These readjustments have a considerable impact on the aggregated balance sheet structure of French companies. According to the weighted mean, the newly created ratio of amounts owed by group and associated companies comes to a share of 10 % of the balance sheet total, while - as a countermove to that - trade debtors fall from 24 % to 19 % and the item other debtors is reduced from 9 % to 4 %. The effects on the liabilities structure are even larger. After the adjustment measures taken, an overall group and associated companies ratio of 12 % is recorded, and the related reduction in commercial creditors amounts to 3 percentage points, in other financial creditors to roughly 8 percentage points, and in other creditors to 1 percentage point.  7KH IRUPDW RI WKH DQQXDO DFFRXQWV ZLWK UHVSHFW WR SURILW DSSURSULDWLRQ Whereas the financial statements of French corporations are generally shown before profit appropriation or treatment of loss, the annual accounts of German incorporated enterprises are always shown after the at least partial appropriation of profits, since for some enterprises there are legal or statutory requirements to appropriate profits already on the balance sheet date. The consequence is that under the heading of own funds, German enterprises only disclose the retained part of the profit for the year, whereas French corporations show the total profit as a capital sub-item. The profit to be distributed (proposed appropriation), by contrast, is shown according to the German regulations under borrowed funds, as far as dividends are concerned. In addition, profit and loss transfers to parent companies - constituting a part of that result allocation - are included in the profit and loss account. They have to be disclosed in an item before the "Net income/loss for the year" and lower or increase a companys disclosed earnings. As these specific German profit appropriation regulations affect the amount of own funds and of total liabilities shown in the financial statements of German corporations, all the annual accounts in the Bundesbank base had to be readjusted into a format before profit appropriation. The recalculated balance sheets include the complete profit or loss for the financial year before profit and loss transfers and, as a countermove to that, liabilities, reserves as well as income and losses on participations for parent companies are reciprocally reduced. The readjustment procedure adds roughly 2 percentage points to the aggregated own funds ratio of German corporations.

- 52 -

 7KH GLVFORVXUH RI VSHFLDO WD[EDVHG UHVHUYHV

The reverse authoritative principle is firmly enshrined in German accounting practice, according to which the recognition of a valuation for tax purposes depends on whether the same valuation is used in the commercial balance sheet. Accordingly, the Commercial Code (tHandelsgesetzbucht) stipulates that reserves which under tax regulations lower profits, and for which tax is to be paid only when they are released, are to be shown under special reserves. Much the same applies to value adjustments on account of special tax depreciation. Value adjustments permissible under tax legislation but exceeding the amount envisaged under commercial law can be deducted, either directly or by showing them under special reserves. Like untaxed reserves, special tax depreciation facilities have a dual character (partly capital, partly provision for deferred taxes), which is why in Germany 50 % of the special reserves are included under own funds and 50 % under borrowed funds for the purposes of financial analysis. A comparable linkage of the commercial balance sheet to the tax balance sheet exists in French accounting law, which distinguishes between special tax-law-based reserves and special tax-law-based provisions, which both more or less correspond to the German special reserves and are formed only on account of tax regulations. Among the untaxed reserves that may be set up on the liabilities side are long-term appreciation gains from sales of fixed assets, which are to be reinvested, and special government assistance. Under special tax-law-based provisions, French enterprises may, in particular, set up provisions for inflation and for exchange rate fluctuations, as well as provisions for foreign investment and foreign loans, which under German tax legislation would be defined as untaxed reserves. In France the total amount of reserves set up for tax purposes is shown under own funds, despite its dual character. In order to increase the comparability of the data, the same treatment of special tax-based reserves as in France was applied to the Bundesbankss data, which means that the total amount of that kind of reserves was allocated to a special subitem of own funds, an adjustment which increases the own funds ratio of German corporations by another 1 percentage point.  $YRLGDEOH DFFRXQWLQJ GLVFUHSDQFLHV  7KH GLIIHUHQWLDWLRQ RI RWKHU GHEWRUV DQG FUHGLWRUV As a logical consequence of the disclosure of debtors and creditors according to destination (degree of economic integration) and not according to nature, the German accounting regulations do not differentiate other debtors and other creditors, but show them - irrespective of their character - in one item. The French regulations, by contrast, make it pos- 53 -

sible to distinguish between other financial and other non-financial creditors and debtors, as described in 3DUDJUDSK  Owing to the lack of information on this issue in the Bundesbankss data, the differentiation between other financial and non-financial debtors and creditors in the French data had to be abandoned in order to ensure the comparability of the data. Analogously to the measures taken for the adjustment of debtors and creditors to group and associated companies, only one residual item was set up for other creditors and other debtors, comprising both financial and non-financial components of creditors and debtors. As a logical consequence of this, the general distinction between financial and non-financial debts became obsolete, so that only a common definition of total debts was retained which excludes provisions, on account of their twofold nature (debts and quasi own funds).  7KH GLVFORVXUH RI ILQDQFLDO DVVHWV The standard layout for the balance sheet of the French accounting plan does not distinguish between participations and shares in affiliated enterprises, as the latter have to be disclosed under the heading tparticipationst. That problem is resolved by summing both subitems in the German accounts into one position. But even more importantly, the criteria for the assumption of a participation differ noticeably in the two countries. Under German law, participations are defined as holdings in other enterprises designed to serve the interests of the company through the creation of a long-term link with another business. In cases of doubt, holdings in an enterprise that exceed in nominal value 20 % of the nominal capital of the enterprise are assumed to constitute participations. According to the PCG, participating interests are interests of which long-term ownership is considered useful to the companyss activities, in particular because such ownership enables control or influence to be exercised over the investee company. In practice, an investment is presumed to be a participating interest if some or all of the shares were acquired as the result of a public cash or share offer, or if the shares represent at least 10 % of the capital of the investee. In other cases they are treated as short-term investment with the exception of those which are held for strategic purposes. The different limits for the presumption of a participation affect the comparability of the financial asset items considerably, as the delimitation between participations and other long-term investments is distorted, with the result that the degree of financial interlinking between companies is systematically understated in German accounts by comparison with their French counterparts. No additional position was calculated to neutralise the effects of these disclosure differences, but by focusing on the total financial assets position, these heterogeneities are removed.

- 54 -

 ,QVROXEOH DFFRXQWLQJ GLVFUHSDQFLHV  'LIIHUHQFHV LQ WKH GLVFORVXUH DQG YDOXDWLRQ RI SURYLVLRQV Corporate accounting policy in Germany pursues a markedly different approach from that of French businesses as far as accounting for provisions is concerned, probably as a consequence of the substantial differences in tax regulations (for details see %R[HV  and  in &KDSWHU ). Although the accounting philosophy is geared mainly to creditor protection in both countries, so that the prudence principle is one of the governing rules of accounting legislation, important conceptual heterogeneities and valuation and disclosure differences can be observed in the corresponding legal regulations for French and German corporations. These are compounded by different customs concerning the formation of provisions for pensions and a different extent of company-based retirement pension schemes in the two countries. Under German law no distinction is made between accruals and provisions, as tRckstellungent have to be disclosed for liabilities for risks and charges of which either the existence or amount is uncertain. Therefore, some relatively certain future obligations likewise have to be covered by provisions (e. g. tax liabilities) in Germany, while they are disclosed as liabilities in France. The French legal definition stipulates that provisions only have to be set up to meet real risks which will probably lead to a liability for the enterprise, although the amount may be uncertain. A further conceptual difference exists with regard to the evaluation criteria. Whereas in France the O.E.C.C.A. (tOrdre des experts comptables et des comptables agrst) defines clear-cut rules for determining the amount to be provisioned, of which only the most probable estimation has to be used, German regulations leave more room for discretionary latitude by firms, as accounting law merely stipulates that provisions have to be stated at the amount required, based on sound commercial judgement. In addition, provisions for liabilities to third parties are generally mandatory in Germany, which is not the case in France. This obligation concerns such items as provisions for pensions. Further differences exist in the treatment of special types of provisions, for example as regards provisions for deferred repairs and maintenance. While in Germany a provision is required if such expenses are to be incurred in the three months following the balance sheet date, and an accounting option exists for expenses to be incurred between four and twelve months after the balance sheet date, French accounting law does not permit provisioning for operating charges unless there is a clear link between the expense to be incurred and the related events having occurred before the balance sheet date. But the most important difference in accounting for provisions relates to provisions for pensions. In Germany, company pension entitlements usually represent

- 55 -

direct obligations of the employer, a special type of firm-based retirement pension system which is not very common in France (for details see &KDSWHU  %R[ ).  5HYDOXDWLRQ RI DVVHWV In contrast to the German "HGB", the French "PCG" permits the periodic revaluation of assets, a subject which was also introduced as an option for the Member States by the Fourth EC Directive. For French enterprises, revaluations were last prescribed by law in 1976-7. Since 1984, they have only been possible on a voluntary basis. Under this option, which, in contrast to legal revaluations, does affect profits or losses and taxes, all tangible fixed assets and financial assets, in general excluding intangibles, can - within certain limits - be revalued at any time. However, the resulting increases in value must be shown in a special capital sub-item. They may not be used to compensate for losses or be distributed; a partial or complete conversion into subscribed capital is permissible, however. These current regulations are of minor practical importance, as the revaluation reserve is a taxable item (only attractive for firms carrying losses), so that GH IDFWR the historical cost principle is currently the dominant valuation principle in France. Nevertheless, it cannot be ruled out that revaluation-related differences still exist between the French and German data, something which is difficult to assess precisely. Only to the extent that assets which were the object of legally prescribed revaluations in the past are still recorded in the French balance sheets and are not yet completely written off could a partial valuation at replacement cost or a correction for purchasing power index differences remain in the valuation of assets, while in the annual accounts of German businesses assets are stated exclusively at historical costs at their entry date.  'LIIHUHQFHV LQ WKH YDOXDWLRQ RI WDQJLEOH IL[HG DVVHWV DQG VWRFNV A further significant difference relative to the French regulations exists in the valuation of tangible fixed assets and inventories, especially as far as production costs are concerned. As the law in both countries only mentions different cost components which are mandatory or optional, only the differences relating to the definition of the upper and lower limit of production cost can be discussed. Concerning the lower limit of production costs, the French definition seems to be more comprehensive, as not only direct material costs, direct manufacturing costs and direct special manufacturing cost (which is also required by the "HGB") but also an appropriate proportion of indirect costs that are directly related to the production process have to be included. More important are the stipulations for the upper limit, as companies could use this latitude to capitalise costs and influence the level of disclosed earnings. With respect to this issue, the German regulations provide considerable options for the inclusion of additional cost elements, which are general administration - 56 -

costs, overhead costs, related depreciation of fixed assets, expenditures on social amenities and interest on loan capital. The respective French regulations are much more restrictive, as no extensive definition of includable cost components is provided. Unlike in Germany, there is a general prohibition of including general administration costs, and the capitalisation of indirect costs is closely linked to the principle of appropriateness, which is scrutinised rigorously by the tax authorities. Furthermore, it should be pointed out that simplified inventory valuation methods based on LIFO (last in - first out) are not commonly used in France and are not recognised by the tax authorities.  'LIIHUHQFHV LQ DFFRXQWLQJ IRU LQWDQJLEOHV Basic differences also exist in the accounting of intangibles in the two countries; these were isolated but not neutralised. Under French accounting law preliminary expenses and costs of issuing shares can either be capitalised and amortised over a maximum period of 5 years or, alternatively, can be charged immediately to the profit and loss account. In Germany, by contrast, the capitalisation of these expenses is not permitted. In compliance with the Fourth EC Directive, the French PCG also permits the capitalisation of applied research and development expenditures, but only applied research costs and development expenditure can be capitalised as intangible fixed assets. In addition, the project(s) must be separately identifiable and have realistic expectations of commercial success. According to the HGB, a capitalisation of R&D expenditures is forbidden. Moreover, the treatment of goodwill is not homogeneous in the two countries. Despite the fact that the capitalisation of self-generated goodwill is not permitted in either country, purchased goodwill must be capitalised under the provisions of French accounting law, whereas the German regulations only provide an option for the disclosure of those items as a matter of accounting convenience.  7KH WUHDWPHQW RI OHDVLQJ Owing to the fact that the Fourth EC Directive does not provide any rule for the disclosure of leased assets, the requirements for the disclosure of leasing are not compatible in France and Germany. In general, it can be stated that under French law the juridical ownership principle forms the basis of disclosure, while German regulations refer to the economic ownership principle irrespective of the juridical point of view, a difference which in fact solely affects the recognition of financial leasing. As a rule, French financial statements disclose finance-leased assets within the balance sheet of the lessor until a purchase option is exercised, while in German accounts - where the lessee is regarded as the economic owner - these properties have to be recorded as a debtor in the lessors balance sheet and as an asset for the lessee, who capitalises it at acquisition cost and compensates for that - 57 -

amount with a liability corresponding to the outstanding instalment payments (leasing rates).  $FFRXQWLQJ IRU JUDQWV DQG VXEVLGLHV The accounting procedures for public grants and subsidies appear to be quite different in the two countries, an area for which the Fourth EC Directive does not contain any provisions. While in Germany there are no legal regulations for these items, subsidies and grants, to the extent that they are not repayable, must either be deducted from the purchase price (thus lowering the value of the assets) or be shown on the liabilities side in a separate item in accordance with the recommendations of the Central Committee of the Institute of Auditors. Direct entry under income, which would affect the profit or loss, is considered appropriate in exceptional cases only. French accounting legislation, on the other hand, offers enterprises an option for investment grants, which can be shown either as a direct entry under extraordinary income, thus affecting the profit or loss, or in a separate capital sub-item that serves mainly to spread the associated income over a longer period. Whereas arguably the most common practice in Germany consists in directly deducting the granted amount from the acquisition costs, French enterprises have the option of disclosing them within own funds for matching purposes. As a consequence, a non-adjustable difference occurs, which has to be borne in mind when examining the levels of own funds in the two countries.

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7DEOH  7KH KDUPRQL]HG FRQFHSW IRU WKH EDODQFH VKHHW VWUXFWXUH $ /LDELOLWLHV
hArpuhs i8vqvph p8yyrpvssur7qrihx

(number of the national collection form)

Gvhivyvvr I I Gvhivyvvr

Subscribed capital Share premium account Revaluation reserve Legal reserves Statutory or contractual reserves Special tax-based reserves Other reserves Profit or loss brought forward Profit or loss of the financial year Grants and susidies Special tax-based provisions Total (I) Profits from the issuance of subordinated equity Conditional advances Total (II) Provisions for risks Provisions for charges Total (III) Convertible debenture loans Other debenture loans Borrowings from credit institutions Other borrowings and loans Advances and deposits received on orders Trade creditors and related liabilities Fiscal and social security charges Fixed assets creditors Other liabilities Accruals and deferred income Total (IV) Exchange rate differences ( liabilities ) (V) General Total ( I to V )

DA DB DC DD DE DF DG DH DI DJ DK DL DM DN DO DP DQ DR DS DT DU DV DW DX DY DZ EA EB EC ED EE

Bank loans Short-term bank loans (F.: EH ) (D.: 97) Long-term bank loans (F.: DU-EH ) (D.: 113) Debenture loans (F.: DS+DT+DM ) (D.: 103+119) Commercial creditors Trade creditors (F.: DX-6118* ) (D.: 96+98+112+114) Payments recieved on account (F.: DW ) (D.: 99+115) Loans from group and assoc. companies (F.: 6118*+6312*+6324*+VI ) (D.: 100+101+102+116+117+118) Other creditors (F.: DV+DN-6312*-6324*+DY+DZ+EA-VI ) (D.: 104+121) Provisions (F.: DR ) (D.: 105+106+108+124+126) Provisions for pensions (F.: n.a. ) (D.: 124)

96 Liabilities arising from acceptances and promissory notes 97 Amounts owed to credit institutions 98 Trade creditors 99 Payments received on account of orders 100 Amounts owed to affiliated enterprises 101 Amounts owed to enterprises with which the company is linked by virtue of partcipating interests 102 Amounts owed to partners unless they are included in the capital account 103 Debenture loans 104 Other short-term creditors 105 106 108 109 Provisions for taxation Provisions for deferred taxes Other short-term provisions Profits or dividends for the financial year

proposed for distribution 110 Accruals and deferred income 111 Short-term borrowed funds 112 Liabilities arising from acceptances and promissory notes 113 Amounts owed to credit institutions 114 Trade creditors 115 Payments received on account of orders 116 Amounts owed to affiliated enterprises 117 Amounts owed to enterprises with which the company is linked by virtue of partcipating interests 118 Amounts owed to partners unless they are included in the capital account 119 Debenture loans 121 Other long-term creditors 124 Provisions for pensions and similar obligations 126 Other long-term provisions 127 Reserves subject to future taxation (share of borrowed funds) 128 Long-term borrowed funds 129 Subscribed capital or capital account (including proprietors loans to be included in capital account) 130 Capital surplus (share premium, paid-in surplus, etc.) 131 Earned surplus (profit transferred to reserves) 132 Shares held by third parties 133 Profit brought forward or profit not meant for distribution (+) or loss brought forward or annual deficit (./.) 135 Reserves subject to future taxation (own funds share) 137 Own funds

Loans raised from groups and associated companies VI

Accruals and deferred income (F.: EB ) (D.: 110) Own funds (net) Subscribed capital (F.:DA ) (D.: 129-86) Reserves (F.: DL-DA ) (D.: 130+131+132+133+127+135) Unpaid capital
Drshqqvvhyvshv svurArpu8rhy 7hyhprTurr9hhPssvpr7hr

(F.: AA ) (D.: -79)

- 59 -

% $VVHWV
hArpuhs i8vqvph p8yyrpvssur7qrihx

(number of the national collection form)

6r I I 6r

Uncalled capital Formation expenses Research and development cost Patents and licences Goodwill Other intangible fixed assets Advance payments relating to intangibles Land Buildings Industrial fixtures and equipment Other tangible fixed assets Tangible fixed assets in progress Advance payments on fixed assets Participations Loans to groups and associated companies Other holdings Loans Other financial fixed assets Total (I) Raw material and supplies Goods in progress Services in progress By -products and finished goods Merchandise Advances to suppliers Trade debtors Other debtors Subscribed capital called but unpaid Current investment Cash in hand, at banks Prepayments and accrued income Total (II) Deferred charges (III) Premiums on redemption (IV) Exchange rate differences ( assets ) (V) Total (I to V )

AA AB-AC AD-AE AF-AG AH-AI AG-AK AL-AM AN-AO AP-AQ AR-AS AT-AU AV-AW AX-AY AZ-BA BB-BC BD-BE BF-BG BH-BI BG-BK BL-BM BN-BO BP-BQ BR-BS BT-BU BV-BW BX-BY BZ-CA CB-CC CD-CE CF-CG CH-CI CG-CK CL CM CN CO

Current assets
Liquidities Cash at bank and in hand (F.: CF-CG) (D.: 45) Current investment (F.: CD-CE) (D.: 46+47) Stocks (F.: BL-BM+BN-BO+BP-BQ+BR-BS+BT-BU+ BV-BW) (D.:50+59) Debtors group and ass. companies (F.: 6117*+6219*+VC) (D.: 51+52+53) Trade debtors (F.: BX-BY-6117) (D.: 49) Other debtors (F.:BZ-CA-VC) (D.: 54)

45 Cheques, cash at banks and in hand 46 Shares in affiliated enterprises (current assets) 47 Other securities (excluding own shares, investments held as fixed assets, participating interests and other financial assets) 49 Trade debtors 50 Value of work done but not yet invoiced, if shown separately 51 Amounts owed by affiliated enterprises 52 Amounts owed by enterprises with which the company is linked by virtue of participating interests 53 Amounts owed by partners, unless deductible from own funds (as item 80) 54 Other debtors and assets 55 Raw materials and consumables 56 Work in progress 57 Finished goods and goods for resale 58 Payments on account for stocks 59 Stocks (Total) 60 Prepayments and accrued income(excl. discount) 62 Current assests 63 Intangible assets, e.g. concessions, patents, licences, etc. (excluding goodwill) 64 Land, rights equivalent to real property and buildings, including buildings on third-party land 65 Plant and machinery 66 Other fixtures and fittings, tools and equipment 67 Payments on account and tangible assets in course of construction 68 Tangible assets (Total) 70 Shares in affiliated enterprises (fixed assets) 71 Lending to affiliated enterprises 72 Participating interests 73 Lending to enterprises with which the company is linked by virtue of participating interests 74 Lending to partners unless deductible from own funds (as item 80) 75 Investments held as fixed assets 76 Other lending and financial assets 78 Fixed assets 79 Subscribed capital unpaid, own shares held 80 Amounts owed by and lending to partners and proprietors, if deductible from own funds 81 Deferred item for deferred taxes 82 Goodwill (including added value for mergers) 83 Formation expenses 84 Discount 85 Other adjustments to own funds 86 Amount not covered by own funds, excess indebtedness, negative capital

Fixed assets
Intangibles (F.: AB-AC+AD-AE+AF-AG+AH-AI+AJ-AK) (D.:63+82+83) Tangible fixed assets (F.: AN-AO+AP-AQ+AR-AS+AT-AU+AV-AW+ AX-AY) (D.: 64+65+66+67) Financial fixed assets (F.: AZ-BA+BB-BC+BD-BE+BF-BG+

Loans and advances granted to groups and associated companies VC

BH-BI-6219*) (D.: 70+71+72+73+74+75+76+80) Shares and participating interests (F.: AZ-BA) (D.: 70+72) Lending to group and assoc. companies (F.:+BB-BC-6219*) (D.: 71+73+74)

Drshqqvvhyvshv svurArpu8rhy 7hyhprTurr9hhPssvpr7hr

Prepayments and accrued income (F.:CH+-CI+CL+CM+CN) (D.: 60+81+84+85)

87

6qwrphvhyhpp

- 60 -

7DEOH  7KH LPSDFW RI WKH KDUPRQL]DWLRQ PHDVXUHV RQ WKH DJJUHJDWHG EDODQFH VKHHW RI )UHQFK FRUSRUDWLRQV
6rirsruhvhv  6rhsruhvhv 

Intangible fixed assets Tangible fixed assets Financial fixed assets

suvputhpvhrqphvr

1.72 Intangible fixed assets 17.80 Tangible fixed assets 20.42 Financial fixed assets
"'' suvputhpvhrqphvr

1.72 17.80 20.42

"''

Stocks
suvpuhrhppsqr

19.02 Stocks 0.98

$!% suvpuhrhppsqr

19.02 0.98 18.70 10.33 3.71 7.41 0.89 100.00 36.69 5.25 2.56 4.58 4.24

Commercial debtors
suvputhpvhrqphvr

23.96 Commercial debtors Group & associated companies 8.78 Other debtors
$&

Other debtors
suvputhpvhrqphvr

Liquidities Prepayments and accrued income

Gvhivyvvrirsruhvhv

7.41 Liquidities 0.89 Accruals and deferred income

 Gvhivyvvrhsruhvhv

Own funds Provisions Debenture loans Long- & medium-term bank loans Short term bank loans Other financial debt
suvputhpvhrqphvr

36.68 Own funds 5.25 Provisions 2.56 Debenture loans 4.58 Long- & medium-term bank loans 4.24 Short-term bank loans 10.24
&$#

Commercial creditors
suvputhpvhrqphvr

18.74 Commercial creditors

"#

15.34 11.99 5.76 12.91 2.70 0.68

hppvtvr

Group & associated companies

Payments recieved on account Other creditors

suvputhpvhrqphvr

5.76 Payments recieved on account 11.27 Other creditors

% suvpuursvhpvhyqri

Prepayments and accrued income

6rirsruhvhv

0.68 Accruals and deferred income

hppvtvr 6rhsruhvhv

Intangible fixed assets Tangible fixed assets Financial fixed assets

suvputhpvhrqphvr %! (

Intangible fixed assets Tangible fixed assets Financial fixed assets

suvputhpvhrqphvr %! (

Stocks Inventories
suvpuhrhppsqr

Stocks Inventories BV-BW BX-BY

% & suvpuhrhppsqr

BV-BW BX-BY-6117 6117+6219+VC BZ-CA-VC CD+CF-CE-CG DL-AA DR DS+DT+DM DU-EH EH

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suvputhpvhrqphvr

Commercial debtors Group & associated companies Other debtors Liquidities

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Other debtors
suvputhpvhrqphvr

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Own funds Provisions Debenture loans Long- & medium-term bank loans Short-term bank loans Other financial debt
suvputhpvhrqphvr

Own funds Provisions Debenture loans Long- & medium-term bank loans Short-term bank loans

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suvputhpvhrqphvr

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suvpuursvhpvhyqri

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DW DY+DZ+EA
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- 61 -

 %LEOLRJUDSK\
Corbett, J./Jenkinson, T. (1996): The financing of industry, 1970-1989: an international comparison, Journal of the Japanese and International Economies, 10, pp. 71-96 Deming-Kunt A./Maksimovic V. (1996): Financial constraints, uses of funds and firm growth. An international comparison, World Bank, Policy Research Working Paper 1671 Deutsche Bundesbank (1994): Comparison of the provision of business enterprises in selected EC countries with own funds, Monthly Report, October, pp. 73-86 KPMG (1995): tats financiers compars. Guide de lecture: Royaume-Uni, Allemagne, France, Paris Kting, K./Weber, C. P. (1994): Internationale Bilanzierung. Rechnungslegung in den USA, Japan und Europa, Herne/Berlin Lefebvre, F. (1994): Mmento pratique comptable 1995, Paris Nayman, L. (1996): Les structures de financement des entreprises en Europe, conomie Internationale, 66, pp. 161-182 Ordelheide, D./KPMG (eds.) (1995): Transnational Accounting, 1, London/Basinstoke Perlewitz, F. (1995): Rechnungslegung in Deutschland und Frankreich. Ein Vergleich, Deutsch-Franzsische Industrie- und Handelskammer, Paris Wietek, S. M./Chomiac de Sas, U. (1990): Unternehmensbewertung und Bilanzierung in Frankreich. Ein Leitfaden fr die Praxis, Paris

- 62 -

&+$37(5 

6WUXFWXUHV RI FRUSRUDWH ILQDQFH LQ *HUPDQ\ DQG )UDQFH D FRPSDUDWLYH DQDO\VLV IRU ZHVW *HUPDQ DQG )UHQFK LQFRUSRUDWHG HQWHUSULVHV ZLWK VSHFLDO UHIHUHQFH WR LQVWLWXWLRQDO IDFWRUV

E\ +DQV )ULGHULFKV %HUQDUG 3DUDQTXH DQG $QQLH 6DXYp

- 63 -

 ,QWURGXFWLRQ
The following chapter examines the balance sheet structures of both French and German manufacturing firms and their evolution during the last business cycle, which occurred relatively synchronously in the two countries at the end of the eighties and the beginning of the nineties. The first section assesses the relative importance of the different financing sources used by incorporated companies in France and Germany to solve the financing puzzle. The second section continues with a description of the most outstanding differences in assets structures, thus following Williamsonss proposition that enterprisess financing structures depend on their respective financing needs, which implies that corporate financial structures cannot be meaningfully compared without studying both the liabilities and the assets side of the balance sheet (see &KDSWHU ). The final section summarizes the conclusions derived from the findings with special reference to the architecture and the functioning mechanisms of the respective corporate financing systems in Germany and France. The principal objective of this chapter is to provide a comprehensive description of the financial structures of French and German incorporated companies within the manufacturing sector. It is not intended to produce representative calculations of the aggregated capital structures in the two countries (macroeconomic approach) but rather to analyse typical country-specific financing choices of companies (microeconomic concept). Therefore, instead of the weighted means the median figures of the balance sheet structure ratios, based on the sliding samples, are analysed. In order to provide a mathematically consistent impression of the balance sheet structures (problem of the non-additivity of the median ratios), the weighted means are presented for the total liabilities and the total assets structures as well. Within such an empirical framework, several important questions emerge: What are the country-specific features of corporate finance in France and Germany? How do the structures of corporate finance in Germany and France typically differ and how did they develop during the eighties and the nineties? What are the main reasons for the observed differences in corporate finance? Can the different theories of corporate finance provide relevant explanations?

- 64 -

 And, finally, to what extent do these divergencies reflect basic features of the national institutional framework in general and of the national system of corporate finance1 in particular? A close comparative analysis of each national system of corporate finance especially based on a highly comparable dataset is revealing. It demonstrates not only that many apparently normal features of the national system are not normal at all, but also helps to understand enterprisess financing strategies and preferences in the country-specific economic and institutional context. It frequently also tends to raise important questions about the mechanisms by which corporate financing functions, which otherwise would not be so obvious (Schmidt, 1997).

 6WUXFWXUHV RI FRUSRUDWH ILQDQFLQJ FRPSDUHG

 7KH OLDELOLWLHV VLGH The results derived in this study clearly indicate that the systems of corporate finance in France and Germany differ considerably as regards the main financing sources of companies, namely RZQ IXQGV GHEWV DQG SURYLVLRQV IRU ULVNV DQG FKDUJHV. Three general stylised facts are of particular significance when the ZHLJKWHG PHDQV of the respective ratios are analysed: The financing activities of German manufacturing corporations tend to be based in almost similar proportions on each of the three sources of company finance, whereas their French counterparts only concentrate on own funds and borrowed funds. Provisions play a less significant role in the annual accounts of French corporations and, as a result, total indebtedness amounts to approximately twice that of German companies. Despite the marked slackening of business activity in the first half of the nineties in both countries, the principal financing patterns of west German incorporated enterprises remained more or less stable, whereas French corporations actually improved their financial situation considerably at the end of the eighties and in the first half of the nineties by significantly raising their level of own funds.

1 According to Nardozzi (1992), a financial systems model (system of corporate finance) can be defined as the whole financial structure and the regulations applied to it.

- 65 -

)LJXUH 
weighted mean
100%
TprsyvhivyvvrBrh

80%

60%

40%

20%

0% 1987 1988 1988 1989 1989 1990 Own Funds 1990 1991 Total debt ( creditors ) 1991 1992 Provisions R&C 1992 1993 Pensions 1993 1994 1994 1995

weighted mean

TprsyvhivyvvrAhpr

100%

80%

60%

40%

20%

0% 1987 1988 1988 1989 1989 1990 Own Funds 1990 1991 Total debt ( creditors ) 1991 1992 Provisions 1992 1993 1993 1994 1994 1995

- 66 -

 Looking at size-specific financing patterns (see )LJXUH ), it becomes immediately evident that the financial structures of French corporations tend to be much more homogeneous than is the case for west German businesses, as the graduation by company size is far less significant in France than in Germany.  6WUXFWXUHV DQG WUHQGV RI RZQ IXQGV An essential feature of the corporate finance systems in Germany and France is that of the provision of firms with RZQ IXQGV. As measured by the ZHLJKWHG PHDQ, the overall own funds ratios do not seem to differ substantially between the two countries. But in contrast to Germany, where the equity ratio for all manufacturing enterprises did not change significantly in the period considered but remained relatively stable at a level of roughly 31 %, the shares of own funds in the balance sheet totals of French corporations display a marked dynamism. French businesses were able to raise their own funds by more than 10 percentage points from 26 % in 1987 to almost 37 % in 1995 (for similar results see Boissonade and Tournier, 1996). As expected, this increase was particularly pronounced in the phase of accelerating economic upswing at the end of the eighties, but it also continued at a slower pace during the following recession. If the median figures of the own funds ratios are considered, a major difference appears: the level of capitalisation of French enterprises, having increased from 25 % to 32 % at the end of the period on average, amounts to almost twice that of their German counterparts, which display a more or less unchanged own funds ratio. This overall tendency of a low but stable capital structure of west German manufacturing businesses contrasts markedly with the respective situation of the French industrial sector. Here the firms, notably the smallest ones, - displaying already a comparatively elevated level of capital - were much more concerned about their solvency (as a result of significant modifications of solvency assessments by creditors) and consequently tried to reinforce their capital structure, even in times of unfavourable economic conditions, whereas their German counterparts only succeeded in preventing any greater erosion of their equity base. It goes without saying that some of these businesses used part of their own funds to compensate for losses as the marked cyclical slump impaired the corporationss profitability and in some respects their financing patterns as well. But even in the period of economic recovery German corporations laid no special emphasis on capital formation. In Germany, evidently, the own funds ratio shown in the balance sheet seems to be less important for the determination of companiess creditworthiness than is the case for French businesses.

- 67 -

)LJXUH 
median by size 39.0 36.0 33.0 30.0 27.0 24.0 21.0 18.0 15.0 12.0 9.0 1987 1988 1 to 19 1989 20 to 99 1990 1991 1992 500 to 1999 1993 >= 2000 1994 Total 1995
PsqhvqphvhyhyyvhivyvvrBrh

100 to 499

median by size

PsqhvqphvhyhyyvhivyvvrAhpr

39.0 36.0 33.0 30.0 27.0 24.0 21.0 18.0 15.0 12.0 9.0 1987 1988 1 to 19 1989 1990 20 to 99 1991 100 to 499 1992 1993 1994 >= 2000 1995 Total 1996 500 to 1999

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The different importance and role of own funds in the corporate finance systems of the two countries can easily be demonstrated by breaking down the ratio of capital to balance sheet total by firm size. As the chart clearly demonstrates, French manufacturing firms are relatively homogeneously equipped with own funds with respect to firm size, and the tendency towards an increasing proportion of equity can be seen across the full range of companies in the sample, whatever their size. However, in terms of WKH PHGLDQ, it appears that the higher the number of employees, the bigger the proportion of equity to total assets. The only exception is companies with over 2,000 employees (largest enterprises), for which the median from 1990 onwards is significantly lower than that for companies with between 500 and 1,999 employees (large enterprises). Compared to Germany, the observed equity-related size effects in the French corporate balance sheet structures are very small. Only a maximum difference of roughly 8 percentage points can be found in the level of own funds of the very small (STEs) and the large companies (LEs), whereas in Germany the respective own funds differential amounts to more than 20 percentage points (comparing the smallest and largest firms). As the chart shows, the largest German enterprises (LTEs) had an amount of equity capital which was approximately three times larger than their counterparts at the lower end of the size categories. Their provision with equity capital, according to the median, appears comparatively high, with a share of 31 % in the balance sheet total - compared to the ratios of the respective French corporations. But in clear contrast to the high degree of financial autonomy evident in the capital structure of the largest businesses in Germany (which is probably attributable to market pressure and the reliance of such global players on the capital market, which tend to standardise financial structures), small and medium-sized enterprises tend to be significantly less capitalised. With an average equity ratio of barely 10 % in 1995, the smallest enterprises (STEs) lie far behind at the lower end of the table. The provision of German SMEs with own funds amounts only to between one-third and roughly half the amount of their French counterparts and, even more importantly, their financial autonomy is slightly but continuously weakening; a 2 percentage point decrease was observed for the three lowest size classes, whereas the largest corporations raised their own funds level at the same pace during that period. To conclude, a growing trend towards a marked polarisation of the financial structures in German manufacturing can be established, and this finding inevitably leads to the crucial question of how a major part of German businesses can cope with such a low level of capitalisation. The pronounced difference in the level of own funds in relation to the balance sheet total between small and medium-sized companies, on the one hand, and large corporations, on the other, appears to constitute a specific feature of the German corporate finance system. In general, it can be stated that the enterprisess level of capitalisation largely depends on the extent to which insolvency law recognises loan collateral, and how easy it is for contracting - 69 -

parties to agree such covering transactions with legally binding effect (Delbreil et al., 1997). Basically, German property law, in conjunction with judicial verdicts, which have traditionally taken full account of entrepreneurial requirements, enables a far-reaching mobilisation of assets in the balance sheet for covering credit risks without the need to meet any special formal requirements. Owing to these extensive and flexible mobilisation options, it is quite customary in Germany for banks to have assigned to themselves the total amount of accounts receivable, or the entire tangible fixed assets of an enterprise, by way of a general assignment. It is therefore assumed that in the case of small and medium-sized enterprises, in particular, 70 % to 80 % of the operating assets have been mobilised for the purpose of collateralising loans from banks. But looking more closely at the respective regulations in France, there is nothing to suggest that differences in the provision of credit guarantees as substitutes for own funds could explain the differences in the capital structure between the two countries. With the Loi Dailly of 1981, French jurisdiction reacted to the increasing collateralising requirements of enterprises and established a system for pledging and assigning accounts receivable (tnantissement des crances commercialest), a securitisation instrument which is similar to the German general assignment procedure (tGlobalzessiont) and which adds to the different possibilities to set up warrants under French law and the special French judicial option for the mortgaging of goodwill (tnantissement du fonds de commercet). Taking all that into consideration, French enterprisess ability to supply collateral tends to be similar to that of German enterprises, although there are some doubts as to the efficacy of this in practice (Conseil National de Crdit, 1993). But according to previous empirical studies, it may be assumed that the level of loan creditor securitisation does not seem to differ substantially in the two countries. The only difference is to be found in the formal requirements which have to be met for the transfer of collateral; in France, unlike in Germany, collateral is subject to a registration requirement. A much more important aspect than that of property law is to be found in the fact that German bankruptcy and composition proceedings - and within these regulations especially the aspect of collateral recognition - are obviously extremely important in securing access for small and medium-sized enterprises to borrowed funds (La Porta et al., 1998). The German Bankruptcy Code recognises loan collateral, even in the case of bankruptcy, to a very large extent through the legal concept of separation and preferential satisfaction (tAus- und Absonderungsrechtt), so that a comprehensive protection of creditorss interests is guaranteed. It is obvious that the creditor-friendly regulations of German

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2 Precedence of "privilges gnraux" which include the "superprivilge" of the employees and the preferential claim of the social security funds, and of "privilges spciaux" which above all comprise security interests in the form of liens.

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3 In Germany - in contrast to France - no substantial changes or amendments were made to insolvency law until 1999, when a reform of insolvency law was introduced which is quite similar to US insolvency proceedings. As a result, the current German regulations are based on the Bankruptcy Code of 1877 and the Composition Code of 1935. 4 The executive board/board of management of an incorporated enterprise is actually legally obliged to submit a petition for bankruptcy immediately the enterprise becomes over-indebted; failure to do so may have consequences under civil and criminal law.

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Composition petition

Bankruptcy petition

Judicial composition proceedings Liquidation (Cancellation) Final distribution

Bankruptcy proceedings Termination of proceedings Compulsory composition

Dismissal

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First the costs of bringing the action and realizing the value of the security, then the interest and last of all the principal of the loan have to be satisfied.

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bankruptcy law significantly facilitate the raising of borrowed funds, particularly for small and medium-sized enterprises. This is additionally fostered by the house-bank principle, which is based on close relations and continuous co-operation of a firm with an individual bank, which frequently also manages the private assets of the proprietors or partners of these businesses. This gives the bank not only a better and less costly insight into the actual financial position of enterprises, but also access to additional collateral not shown in the balance sheet, resulting in a significant reduction of screening costs and a substantial decrease in credit risks. The significance of own funds inevitably decreases under such circumstances since, in cases of doubt, the assignment of assets provides safer cover for loans than does an adequate capital base. The underlying conditions for capital procurement in France, especially for small and medium-sized firms, appear to be quite different. French restructuring insolvency procedures are primarily oriented towards the rescue of the enterprise, which results in the tfreezingt of creditor rights so as to prevent the premature destruction of the insolvent partyss estate. According to the assessment of experts, there were hardly any possibilities for the creditor to realize assigned assets under the French tredressement judicairet until 1994 (when the law was reformed), in particular, since all claims arising during the procedure in the form of wages, loans to the estate and taxes were to be satisfied prior to the old claims, even if they were secured by collateral. This priority of new against already existing claims was abandoned by the new law in order to avoid rendering credit guarantees ineffective. A new ranking order of old and new claims was stipulated by which secured creditors are ranked below the claims of the employees and the judiciary. To sum up, it may be concluded that real security was, and to some extent still is, of limited value during the insolvency procedure in France (Wood, 1995) and that therefore banks are exposed to a larger risk of incurring insolvency losses than is the case under German bankruptcy law. Another pointer to the influence of diverging institutional regulations on the provision of French and German companies with equity capital can be derived by a more detailed analysis of the components of the own funds ratio, which are subscribed capital and reserves. The following chart shows that, as far as the median of VXEVFULEHG FDSLWDO to total liabilities is concerned, only minor differences were observed between the two countries. Despite a greater homogeneity in France, a comparable graduation of subscribed capital specific to the size categories of the companies in the two countries is confirmed, thus suggesting that - despite the various measures taken to deregulate financial markets access to capital markets still depends on the size of the business. But such a simple explanation is clearly contradicted by the results derived for the largest companies in the two countries, whose proportion of paid-up capital seems to be significantly lower than it is for other companies in the size class from 500 to 1,999 employees (LEs). In addition, the com- 77 -

parative results for the subscribed capital ratio do not contain much to suggest that the liberalisation of the financial markets, which were more drastically reformed in France than in any other European country, has noticeably contributed to a manifest increase in the financial autonomy of French firms. By contrast, the subscribed capital ratio, which might give an indication of easier access to the capital market on the part of corporations, amounted to a level below that of German businesses and remained relatively constant during the entire period under review. Nevertheless, this conclusion has to be treated with caution, as a precise assessment of the effective impact could only be assessed by analysing consolidated accounts. Furthermore, the comparatively high level of capitalisation of French corporations seems to be primarily a result of the accumulation of UHVHUYHV, which for SMEs (depending on the size class under review) are ten to four times higher than the level recorded for their German counterparts. For the larger corporations this difference is substantially less pronounced. A factor of 2 to 1.5 only was observed. The increase in these funds was particularly pronounced for French firms at the end of the eighties and the beginning of the nineties, when economic conditions were quite favourable and tax regulations provided particular incentives to retain earnings (temporary lower rate for retained earnings than for distributed profits, see %R[ ). Furthermore, the accumulation of reserves within German manufacturing corporations has been particularly influenced by some specific regulations of tax law, as a significant release of revenue reserves can be observed for some size classes in 1993/94. Owing to amendments of the Corporation Tax Act, enterprises had the option to reduce their tax burden by releasing revenue reserves, subject to the tax rate of 56 % until 1989 and 50 % until 1993, respectively, in the following years and making them available for distribution. The relief afforded to enterprises results from the fact that the distributed profits were then subject to a corporation tax rate of only 30 %. The resulting tax advantage of 26 and 20 percentage points, respectively, was refunded or could be offset (Deutsche Bundesbank, 1994). As reflected by the figures for the reserves to total liabilities ratio, some of the manufacturing enterprises, across all size classes, made use of this option, especially in 1993, when these amendments came into force. As measured by the balance sheet total, this is particularly reflected by the third quartile of the reservess ratio.

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)LJXUH 
median by size 16.0 15.0 14.0 13.0 12.0 11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0 1987 1988 1 to 19 1989 20 to 99 1990 100 to 499 1991 1992 500 to 1999 1993 >= 2000 1994 Total 1995
TipvirqphvhyhvqphvhyhyyvhivyvvrBrh

median by size

TipvirqphvhyhvqphvhyhyyvhivyvvrAhpr

16.0 15.0 14.0 13.0 12.0 11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0 1987 1988 1 to 19 1989 1990 20 to 99 1991 100 to 499 1992 500 to 1999 1993 1994 >= 2000 1995 Total 1996

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median by size 25.0 23.0 21.0 19.0 17.0 15.0 13.0 11.0 9.0 7.0 5.0 3.0 1.0 1987
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1988 1 to 19

1989 20 to 99

1990 100 to 499

1991

1992 500 to 1999

1993 >= 2000

1994 Total

1995

median by size

SrrrhyyvhivyvvrAhpr

25.0 23.0 21.0 19.0 17.0 15.0 13.0 11.0 9.0 7.0 5.0 3.0 1.0 1987

1988 1 to 19

1989

1990 20 to 99

1991 100 to 499

1992

1993

1994 >= 2000

1995 Total

1996

500 to 1999

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All these findings tend to reaffirm the assumption that a second major determinant of the level of own funds is to be found in the country-specific differences in the taxation of internal and external financing. French corporation tax for retained and distributed profits was lowered considerably in the period under review. The tax burden on corporations was significantly reduced in several steps, whereas in Germany the lowering of the tax retention rate occurred later and was less pronounced. But an even more important consideration appears to be that the retention of profits is made particularly attractive in France. It is hard to say just how strongly these divergencies in the tax systems of the two countries affected enterprisess formation of capital, but it can undoubtedly be concluded that these special regulations of the French tax system provided fairly favourable conditions for the improvement of the capital structure of French businesses. Apart from the influence of such legal factors, the findings could also be regarded as indicating that French corporations tend to follow a financing strategy geared to the pecking-order approach, a behaviour which was also observed for the larger German firms. %R[  %DVLF GLIIHUHQFHV LQ WKH FRUSRUDWLRQ WD[ V\VWHP
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France
Year 1987 1988 1989 1990 1991 1992 1993 1994 1995

Germany

Distributed corpo- Retained corpo- Top income Spread between Distributed corporation tax rate ration tax rate (1) tax rate (2) (1) and (2) ration tax rate 50.00 50.00 56.80 6.80 36.00 42.00 42.00 56.80 14.80 36.00 42.00 39.00 56.80 17.80 36.00 42.00 37.00 56.80 19.80 36.00 42.00 34.00 56.80 22.80 38.70 34.00 34.00 56.80 22.80 38.70 33.33 33.33 56.80 23.47 36.00 33.33 33.33 56.80 23.47 30.00 33.33 33.33 56.80 23.47 32.25

Retained corpo- Top income Spread between ration tax rate (1) tax rate (2) (1) and (2) 56.00 56.00 0.00 56.00 56.00 0.00 56.00 56.00 0.00 50.00 53.00 3.00 53.75 56.97 3.22 53.75 56.97 3.22 50.00 53.00 3.00 45.00 53.00 8.00 48.38 56.97 8.59

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 &RXQWU\VSHFLILF SDWWHUQV RI LQGHEWHGQHVV As a mirror image of the provision of enterprises with own funds, the rough aggregate of total creditors (bank loans, commercial creditors, loans from group and associated companies and other creditors) as a percentage of the balance sheet total shows pronounced differences between the manufacturing firms of the two countries. According to the ZHLJKWHG PHDQ, French corporations are distinctly more indebted than their German counterparts: the overall debt ratio exceeds the respective findings for German firms by more than 90 %. But contrary to Germany, the total indebtedness ratios for French corporations show a continuous trend of disintermediation throughout the nineties: they reduced their debt burden in relation to the balance sheet total by more than 10 percentage points, whereas it remained more or less constant in the case of German businesses. One particularly noteworthy aspect is that the aggregated financial structure of both French and German firms proved to be relatively insensitive to cyclical fluctuations, even during the period of the painful cyclical slump in 1992/93 and during its very first emergence in 1991 and 1990 (France). Companies evidently did not significantly change their borrowing behaviour, despite sustaining a substantial deterioration in their earnings position. However, if WKH PHGLDQ of the total creditors ratios is analysed, the finding of a comparatively low indebtedness of German manufacturing firms has to be reconsidered. According to the median, the total creditorss ratio of German firms doubles, thus signalling that the financial situation of firms in the manufacturing sector appears to be considerably less homogeneous than that of French manufacturing businesses and that the impression of a lower leverage for west German firms in comparison to their French counterparts only holds true for a part of the corporations under review, namely the largest businesses with 2,000 and more employees. The intensity of the structural discrepancies of indebtedness can easily be demonstrated by breaking down the median ratios by size class. The figures show that the total indebtedness of the largest companies amounts to less than half that of those within the two lower size classes (up to 99 employees), which demonstrates that the incurrence of liabilities depends greatly on the size of the business. This finding is of far less significance for French corporations. Whereas in German manufacturing the sizespecific range of the total indebtedness ratio varies from 30 % for the largest companies to approximately 80 % for the smallest corporations, the respective ratios for the French LTEs and STEs only display a spread of roughly 10 percentage points, ranging from 62 % to 73 %. This might suggest that German LTEs seem to be in a situation of considerable financial autonomy, a finding which was also confirmed for the firms in the second largest size class, which recorded a leverage ratio that was 20 percentage points lower than that of their French counterparts. The opposite appears to be true for STEs, for which an indebtedness ratio of 80 % is recorded in Germany and only of 70 % for France. It can - 83 -

further be demonstrated that the financial autonomy of the large German companies was actually reinforced in the late eighties and early nineties, despite the cyclical downswing in that period. Whereas the share of debt in the balance sheet of German corporations rose at least slightly for small and medium-sized enterprises, it decreased almost continuously in the case of large enterprises throughout the period under review (from 36 % to 30 %). In France, however, a general trend of disintermediation can be observed also for the lower size classes, something which does not hold true for the respective German corporations. To sum up, therefore, it can be said that - in contrast to the situation in France - the financial situation of German manufacturing enterprises shows a massive divergence by firm size and that this difference from the situation in France became even more pronounced in the period under review.

)LJXUH  7KH EXVLQHVV F\FOH LQ )UDQFH DQG *HUPDQ\ TXDUWHUO\ JURZWK UDWHV RI *'3 DW FRQVWDQW SULFHV
%
2 .0 1.5 1.0 0 .5 0 .0 -0 .5 - 1.0 - 1.5 - 2 .0 19 8 5 19 8 6 19 8 7 19 8 8 19 8 9 19 9 0 19 9 1 19 9 2 19 9 3 19 9 4 19 9 5

D )UDQFH

%
4 .0 3 .0 2 .0 1.0 0 .0 - 1.0 - 2 .0 - 3 .0

E :HVW*HUPDQ\

19 8 5

19 8 6

19 8 7

19 8 8

19 8 9

19 9 0

19 9 1

19 9 2

19 9 3

19 9 4 19 9 5

- 84 -

)LJXUH 
median by size
UhyprqvhyyvhivyvvrBr h

80.0 75.0 70.0 65.0 60.0 55.0 50.0 45.0 40.0 35.0 30.0 1987

1988 1 to 19

1989 20 to 99

1990 100 to 499

1991

1992 500 to 1999

1993 >= 2000

1994 Total

1995

median by size

UhyprqvhyyvhivyvvrAhpr

80.0 75.0 70.0 65.0 60.0 55.0 50.0 45.0 40.0 35.0 30.0 1987

1988 1 to 19

1989

1990 20 to 99

1991 100 to 499

1992

1993

1994 >= 2000

1995 Total

1996

500 to 1999

- 85 -

)LJXUH 
median by size
7hxyhhyyvhivyvvrBrh

23.0 21.0 19.0 17.0 15.0 13.0 11.0 9.0 7.0 5.0 3.0 1.0 1987

1988 1 to 19

1989 20 to 99

1990 100 to 499

1991

1992 500 to 1999

1993 >= 2000

1994 Total

1995

median by size

7hxyhhyyvhivyvvrAhpr

23.0 21.0 19.0 17.0 15.0 13.0 11.0 9.0 7.0 5.0 3.0 1.0 1987

1988 1 to 19

1989

1990 20 to 99

1991 100 to 499

1992

1993

1994 >= 2000

1995 Total

1996

500 to 1999

- 86 -

The observed relatively moderate sensitivity of the overall total indebtedness of German and French manufacturing corporations to cyclical change is put into perspective once the different sources of enterprisess financing activities are considered in detail and the substitution processes between the various means of financing become visible. In the period under review, a global tendency towards a steady reduction of EDQN GHEW (as a percentage of the balance sheet total) can be assumed solely for the French corporations. Several studies have suggested that this tendency reflects a corporate strategy geared towards disintermediation (see Deutsche Bundesbank, 1992; Boissonade and Tournier, 1996; Demartini and Kremp, 1998). Such a trend is not confirmed by the results found in this analysis for Germany as regards the median of the ratios for all manufacturing enterprises. According to the weighted mean the average indebtedness of German manufacturing firms to credit institutions is slightly decreasing from 9 % in 1990 to 7 % in 1995, whereas the median figures, by contrast, indicate a by far larger average amount of bank debts in relation to total assets as well as a moderate increase of this ratio from 1991 onwards (from 17 % to 19 %). These findings for Germany, which at first sight appear contradictory, can be explained by looking more closely at the pattern of borrowing by firm size. The total weighted means of the bank indebtedness ratios are massively influenced by the specific situation of the largest companies. Owing to their large weight, these figures primarily reflect a trend towards disintermediation in the segment of firms with more than 500 employees. For the largest businesses (2000 employees and more) bank dependency is actually more or less non-existent, as their share of bank debt in the balance sheet total did not exceed on average 2.5 % and 1.5 %, respectively (weighted mean versus median), at the end of the period under review. For small and medium-sized enterprises (SMEs), on the other hand, a process of growing intermediation is evident, notably in the size classes from 20 to 499 employees. That tendency is predominantly mirrored by the total median ratios. Therefore, it may be assumed that for a substantial proportion of German manufacturing firms, notably for those with less than 500 employees, the conventional bank loan still tends to be the most important source of financing, whereas larger businesses clearly opted for a policy of decoupling from the lending opportunities of the banking system by repaying bank debt and concentrating on alternative sources of finance (mainly internal financing and direct access to capital markets). As mentioned above, the median figures for France reveal not only a universal and steady reduction in bank-related indebtedness but also a distinctly less pronounced differentiation of bank lending by firm size. Companies with up to 499 employees had greater recourse to bank debt - their share in the balance sheet total amounts to approximately 10 % (which is less than half of the respective ratio for German SMEs) - whereas their larger counterparts, which are able to raise funds on the capital markets, have the same low bank debt ratio as their German counterparts. Moreover, during the period under review this type of debt was - 87 -

reduced by a greater margin (10 percentage points) in the case of very large companies than for other companies, which registered a reduction of 8 percentage points for companies with between 500 and 1,999 employees and a maximum of 5 percentage points for SMEs. The observed massive shifts in the bank-borrowing behaviour of the larger companies in the two countries was probably encouraged by the expansion of the financial markets during the mid-1980s (in Germany at the end of that decade), the opening up of the money market to new players, and the creation of negotiable debt instruments. As a consequence, larger companies during the nineties are clearly sourcing more funds directly from the markets at the expense of bank borrowing, reflecting a certain degree of substitution in financing methods. The observed country-specific patterns clearly indicate that the French corporate finance system, as a whole, is much less bank-oriented than is the case in Germany.6 In contrast to the situation in Germany, bank loans are by no means the most important source of external finance for French manufacturing firms, even in the segment of SMEs. These findings, which are fully in line with the arguments put forward to explain the level of own funds, might indicate a fundamental difference in the respective corporate finance systems in the two countries. As mentioned, an unmistakable and growing trend towards tdsintermediationt and tdbancarisationt can be observed during the nineties for the financing of all size classes of French firms, whereas a similar tendency could only be observed for the largest German corporations. By contrast, German SMEs are heavily dependent on banks, and this situation appears to be continuously increasing thanks to the legal and institutional regulations in Germany, which distinctly limit the credit risks incurred by banks in a (partial) overdraft economy (as defined by Hicks, 1975). The Hausbank principle and the relevant legal regulations seem to provide extremely favourable conditions for banking intermediation. It goes without saying that in such a context capital market-based financing instruments play only a minor role for a large proportion of German businesses, at least as far as direct access to capital markets rather than inter-group financing activities is concerned. It may be concluded that, in the segment of German small and medium-sized enterprises, the conventional bank loan still represents the classical instrument for financing capital formation and working investment, because they do not meet their financial requirements primarily out of internal resources and because these corporations scarcely consider alternative sources and forms of finance, owing to the easy access to bank loans.

6 Nevertheless, in special cases a strong bank-orientation of French businesses could be observed, see Paranque and Rivaud-Danset (1998).

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0DUNHW VKDUH RI ORDQV JUDQWHG WR QRQEDQNV E\ W\SH RI EDQN LQ *HUPDQ\ Bank category / year Commercial banks of which: big banks regional and other commercial banks private bankers Regional giro institutions Savings banks Regional institutions of credit cooperatives Credit cooperatives Other financial institutions
Source: Deutsche Bundesbank (1998).

1990 29.8 10.0 17.7 1.2 12.6 21.4 2.4 11.8 23.0

1994 25.0 9.3 14.1 0.9 14.9 22.8 1.6 13.4 22.3

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7 The Financial Activity Modernisation Act is the transposition into French law of the European Communities Directive 93/22 of May 10, 1993 relating to investment services in the securities field.

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,W LV QRW DOZD\V YHU\ HDV\ WR DSSUHFLDWH WKH TXDOLW\ RI WKH UHODWLRQVKLSV EHWZHHQ EDQNV DQG HQWHU SULVHV LQ )UDQFH 5HFHQW VWXGLHV SXEOLVKHG E\ WKH %DQTXH GH )UDQFH VKRZ WKDW LQ   RI DOO )UHQFK FRPSDQLHV ZHUH SURYLGHG ZLWK FUHGLW EDQNLQJ DQG ORDQV IURP RQO\ RQH EDQN 7KLV KLJK SURSRUWLRQ RI ILUPV FDQ EH H[SODLQHG E\ WKH ODUJH QXPEHU RI VPDOO RU YHU\ VPDOO FRUSRUDWLRQV 0DUNHW VKDUH RI ORDQV JUDQWHG E\ W\SH RI EDQN LQ )UDQFH Bank category / year AFB-banks Mutual and cooperative banks Savings banks Municipal credit banks Other credit institutions Specialised financial institutions 1988 1989 1990 1991 1992 1993 1994 1995 1996 49.5 50.1 51.5 51.0 50.9 50.1 48.5 48.8 49.4 20.9 21.7 21.9 22.5 22.3 22.4 22.8 22.9 24.2 4.2 0.3 7.6 17.5 4.2 0.3 7.3 16.4 4.3 0.3 7.4 14.6 4.2 0.2 7.4 14.7 4.6 0.2 7.3 14.7 4.8 0.2 7.4 15.1 5.2 0.1 8.5 14.9 5.3 0.2 8.2 14.6 5.9 0.1 8.0 12.4

Source: Commission bancaire (several years).

&RQYHUVHO\ ODUJH FRPSDQLHV ZLWK D WXUQRYHU RI PRUH WKDQ )5)  PLOOLRQ ZRUN ZLWK VHYHUDO EDQNV $FFRUGLQJ WR WKHVH ILQGLQJV WKHUH ZDV D VWURQJ FRUUHODWLRQ EHWZHHQ WKH QXPEHU RI EDQNV LQ UHODWLRQ WR D FRUSRUDWLRQ DQG LWV UDWLQJ 7KH VRXQG HQWHUSULVHV UDWLQJ  RU  WHQGHG WR LQFUHDVH WKH QXPEHU RI WKHLU EDQNHUV GXULQJ WKH SHULRG  ZKHUHDV WKLV QXPEHU JUDGXDOO\ GHFOLQHG LQ FRPSDQLHV ZLWK D EDG UDWLQJ 7KDW PD\ UHIOHFW LQWHQVH FRPSHWLWLRQ RQ WKH PDUNHW IRU JRRG ILUPV DV ZHOO DV D VRUW RI UDWLRQLQJ IRU UDWKHU IUDJLOH ILUPV

By subdividing bank loans according to their maturity structure, further essential differences in the financing modes of French and German enterprises become evident. As the following chart shows, VKRUWWHUP EDQN OHQGLQJ in contrast to long-term bank loans, appears to be particularly low in France,8 while the reverse is to be found for Germany and, even more importantly, a reversed size-specific graduation of short-term bank debt is displayed between the two countries. Whereas the share of short-term bank borrowing in the balance sheet total for the two lowest size classes of the French sample amounted to less than 1 %, compared to approximately 10 % for their German counterparts, the larger enterprises recorded a ratio of roughly 1.5 %, compared to 1.5 % and 0.5 %, respectively,
8 The general objection could be raised that balance sheet data are only able to mirror an incomplete picture of short-term debts, as the stock figures exclusively display the situation at the end of the financial year. Within-year financial flows might be substantially larger, due to seasonal cycles in business activities. Furthermore, it might be argued, that the figures for the end of the year could be non-representative, as probably a rather glossed-over impression of the effective financial situation is produced due to windowdressing policy by firms (repayment of short-term bank loans to give the impression of a more sound financial situation to shareholders and lenders). In addition, it should be noted that, as far as the absolute figures are concerned, the total outstanding bank credit to all non-financial French companies showed a different evolution. The global amounts increased regularly (15 % every year) during the second half of the eighties (from FRF 1,900 billion in 1987 to FRF 2,885 billion in 1990). During the following years it then rose only at a moderate pace to reach nearly FRF 3,200 billion in 1992. In 1993 it fell sharply (- 6 %) and remained virtually stable in 1994 and 1995. In contrast to that, it fell in 1996 (-4.5 %) but started rising again in 1997, reaching nearly FRF 2,900 billion at the end of the year.

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for the same upper size classes in Germany. In addition, the results for German corporations indicate that, irrespective of which size class is considered, short-term bank borrowings were much more susceptible to cyclical fluctuations than ORQJWHUP EDQN ORDQV, a fact that is partly self-evident, as these credit contracts are, as a rule, locked in for the entire period. As the figures show, almost all German manufacturing corporations increased their short-term bank debts significantly in 1991, even in the upper size classes, in order to offset temporary liquidity bottlenecks. It seems that in Germany short-term bank lending primarily constitutes a source for covering the running operating costs of the sales revenue-generating process, whereas long-term bank debt predominantly serves to finance (the more long-term oriented) investment activities. But it should also be noted that the majority of manufacturing firms were able to limit their stock of short-term creditors vis-vis credit institutions in the following years, owing to the fact that money market rates were quite high compared with interest rates for longer-term funds, which made short-term borrowing in that period of decreasing business activity especially unattractive. By contrast, French businessess borrowing behaviour appears to be strongly oriented towards long-term contracts, notably for companies with less than 500 employees. As the figures indicate, the level and size structures of the long-term component of bank lending are roughly comparable to the German figures for short-term bank credit. Long-term lending is obviously of minor importance for German manufacturing businesses, as (according to the median) only the balance sheets of small and medium-sized companies record significant proportions (roughly 4 %); whereas it is virtually non-existent in LTEs and STEs. However, several arguments may provide an explanation for the reversed maturity structure of bank loans observed in the cross-country comparison. Firstly, the difference could be the result of accounting differences, as the French CdB-methodology presents a disclosure of bank loans at initial maturities, whereas under German accounting law (in line with the Fourth Directive) a disclosure according to the remaining maturities concept is required. However this argument does not seem to hold true, as a major part of the German annual accounts also consists of tax balance sheets which in part apply the same maturity concept as in France. That structural discrepancy is probably the outcome of systematic differences in the flexibility of interest rates. According to a study by Borio (1996), French interest rates on short-term bank loans are adjustable to a larger extent than is the case in Germany, while the reverse holds true for medium- and long-term bank credit. Another argument seeks to explain the structure of French corporationss bank debt by the relatively high rates charged on short-term loans, especially in late 1992 and early 1993 owing to the recession and unfavourable expectations. But even this explanation does not seem to be particularly convincing, because, during the entire period under review, shortterm lending constantly remained of minor importance in France and was not susceptible to massive fluctuations (as far as is observable from the balance sheet figures). In addition, - 94 -

this trend was observed despite a changing spread between long-term and short-term interest rates. In line with the arguments put forward to explain the different level of own funds, the results might be regarded predominantly as an indication of a shortage of shortterm bank finance for smaller firms in France. It appears quite plausible that credit rationing with respect to short-term loans may exist, as the institutional and legal context, unlike in Germany, is less favourable to the conclusion of this type of lending contracts, but no exact clarification could be provided here as to whether these restrictions have been induced by the supply or the demand side. )LJXUH  /RQJWHUP HYROXWLRQ RI LQWHUHVW UDWHV LQ )UDQFH
14 12 10 8 6 4 2 0 aug-86 aug-91 aug-96 dec-84 dec-89 dec-94 feb-89 jun-87 jun-92 apr-88 apr-93 feb-94 oct-85 oct-90 oct-95

Day to D ay interest rate

10 years State B onds interest rate

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)LJXUH 
TurihxyhhyyvhivyvvrBrh

median by size 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 1987

1988 1 to 19

1989 20 to 99

1990 100 to 499

1991

1992 500 to 1999

1993 >= 2000

1994 Total

1995

median by size 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 1987

TurihxyhhyyvhivyvvrAhpr

1988 1 to 19

1989

1990 20 to 99

1991 100 to 499

1992

1993

1994 >= 2000

1995 Total

1996

500 to 1999

- 96 -

)LJXUH 
median by size 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 1987
GtrihxyhhyyvhivyvvrBrh

1988 1 to 19

1989 20 to 99

1990 100 to 499

1991

1992 500 to 1999

1993 >= 2000

1994 Total

1995

median by size

GtrihxyhhyyvhivyvvrAhpr

9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 1987

1988

1989 1 to 19

1990 20 to 99

1991 100 to 499

1992

1993

1994 >= 2000

1995 Total

1996

500 to 1999

- 97 -

Nevertheless, it may be concluded that with respect to bank loans - notably as far as the short-term proportions are concerned - the systems of corporate finance in the two countries seem to differ perceptibly. In contrast to France, it might be assumed that shortterm bank loans constitute the major buffer of the German finance system, especially for SMEs, as overdrafts in the form of permanent credit facilities or general operating loans frequently collateralised by way of general assignment (tGlobalzessiont) - assure firms a high degree of financial flexibility, a necessary adaptation mechanism, which is secured in the French corporate finance system via other sources of corporate finance, especially via own funds invested in liquidities. But it should not be overlooked that, according to the quartiles of the bank debt ratios, one-quarter of small German businesses (1-19 employees) do not rely on short-term bank lending at all and 50 % of them are not engaged in longterm bank loans (as measured in stock terms at the end of the financial year). Similar findings can be recorded for the French corporations of less than 100 employees, 25 % of which do not record any short-term bank debt and 50 % of which display a ratio of less than 1 %. This is a quite surprising fact, especially for Germany, which might suggest that, even within smaller businesses, the financial structures are much more divergent than is commonly assumed.9 Whereas a large proportion of these firms appear to be in a similar situation of financial autonomy with regard to credit institutions as large corporations are, the problem of heavy indebtedness towards banks is evidently fairly concentrated on a fraction of the firms constituting this size class. These large differences even within the SMEs segment might well be an indication of group financing activities, where bank loans are distributed via holding companies and appear as debts towards group and associated companies in the individual accounts of the subsidiaries. The high degree of bank orientation of the German system of corporate finance is also confirmed - as a mirror image - by the GHEHQWXUH ORDQV/balance sheet total ratio. For the corporations of west German manufacturing industries analysed in this study, direct access to capital market financing via debenture loans played only a marginal or even an insignificant role. The findings for that ratio clearly indicate that this kind of financing is sharply concentrated on a very few notably large corporations, which obviously used these instruments to offset cyclical liquidity bottlenecks. In France some of the larger SMEs were also able to issue commercial paper, although the use of this financing instrument tends to be of minor importance, as the required minimum amounts for an issue frequently exceed the financing scope of that type of business. But it was observed that the launching of debenture loans contributed to a tnon-negligiblet extent towards covering the financing needs of large French firms: their debenture loan ratio (as measured by the weighted mean) amounted in any case to 5 %, which is ten times the corresponding amount of their German

9 For France this conclusion is commonly known, see for example: Conseil National du Crdit (1995).

- 98 -

counterparts. Therefore the significant cross-country differences cannot be explained solely by the fact that debenture loans, especially in the form of commercial paper, require an initial issue volume that only large companies can manage. According to a recent study on industrial finance in Germany and France (Huth, 1996), the most important impediments to the greater use of debenture loans by German corporations must be seen in the particularly unfavourable third-party service costs (see 7DEOH ), which make this financing instrument less attractive than in France. 7DEOH  7KLUGSDUW\ FRVWV RI GHEHQWXUH ORDQ ILQDQFLQJ LQ *HUPDQ\ DQG )UDQFH
Germany Cost components
1. Printing and control of shares 2. Publicity 3. Costs of quotation: a) one-off b) ongoing 4. Lead bank commission

France unit
DM thousand DM thousand DM thousand

min.
0 40

max.
150 100

57 72

min. max.
15 185

15

unit
as % of issuing value DM thousand

6 10 0.5 2.5 0.35 0.225 3.3 0.031

15 15 0.5 2.5 0.35 0.225 3.5 0.031

10 12.5 0.5 2.5 0.35 0.225 3.4 0.031

31 3 0.20 0.8 0.7 0.15 0.15 1.9 0.017

31 3 0.5 0.8 0.7 0.15 0.15 2.4 0.017

31 3 0.35 0.8 0.7 0.15 0.15 2.0 0.017

as % of total lead bank commission as % of nominal value as % of nominal value as % of coupon value as % of redemption value as % of issuing value as % of issuing value

as % of nominal value as % of nominal value as % of nominal value as % of coupon value as % of redemption value as % of issuing value as % of issuing value

5. Quotation commission 6. Underwriting commission 7. Commission for cashing coupons 8. Redemption commission Sum of one-off third-party costs Sum of ongoing third-party costs

Source: Huth (1996), p. 174.

The procurement of borrowed funds via group or holding companies, as an alternative financing source of corporations, tends to be more important on average in Germany than in France, whereas in the latter country a larger graduation by size can be observed. In the German manufacturing corporationss balance sheets, ORDQV IURP JURXS DQG DVVRFLDWHG FRPSDQLHV amount to double the respective French values. Only for French LTEs does the contrary hold true (5 % for German and more than 9 % for French businesses). However, group borrowing increased at an accelerated pace in Germany (by 100 % according to the median in the period under review), whereas it remained more or less constant in France, except in the case of LTEs. This might suggest that, for some segments of German

- 99 -

)LJXUH 
median by size 12.0 11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 1987
GhsthqhpvhrqphvrhyyvhivyvvrBrh

1988 1 to 19

1989 20 to 99

1990 100 to 499

1991

1992 500 to 1999

1993 >= 2000

1994 Total

1995

median by size 12.0 11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 1987

GhsthqhpvhrqphvrhyyvhivyvvrAhpr

1988 1 to 19

1989

1990 20 to 99

1991 100 to 499

1992 500 to 1999

1993

1994 >= 2000

1995 Total

1996

- 100 -

)LJXUH 
IrihyhprsyhsthqhpvhrqphvrhyyvhivyvvrBrh

median by size 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 -4.0 -5.0 1987

1988 1 to 19

1989 20 to 99

1990

1991

1992 500 to 1999

1993 >= 2000

1994 Total

1995

100 to 499

IrihyhprsyhsthqhpvhrqphvrhyyvhivyvvrAhpr

median by size 5.0 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 -4.0 -5.0 1987

1988

1989 1 to 19

1990 20 to 99

1991 100 to 499

1992

1993

1994 >= 2000

1995 Total

1996

500 to 1999

- 101 -

manufacturing, a small fraction of smaller businesses (subsidiaries of large corporations) and the large enterprise sector as a whole, bank borrowing has been increasingly substituted by inter-group financing, so that loans from group and associated companies play a much more important role than bank debt. A similar tendency can be found for a considerable number of larger French firms. This phenomenon reveals a general trend, which has been increasingly pronounced among major corporate groups in both the German and French manufacturing sector in recent years. The tglobal playert businesses, especially, have switched increasingly to meeting their need for borrowed funds, at least partly, through financing subsidiaries (holdings) established directly in the national and international capital markets especially for this purpose and to passing on the funds within the group, thus bypassing the traditional financial intermediaries and procuring financial resources direct in the international money and capital markets (Deutsche Bundesbank, 1994 and 1996). But it has also to be borne in mind in this context that inter-group credit puts companies into a lender and also a borrower position. The net financing contribution of this alternative lending source (measured as creditors less debtors towards group and associated companies in relation to the balance sheet total) appears to be quite divergent in the two countries. German SMEs only record a more or less equalised balance; large corporations, owing to their strong financial position, almost exclusively took the role of the respective lender companies and therefore had to carry most of the financial burden of this financing strategy. LEs and LTEs provide much more funds to subsidiaries than they, for their part, receive from inter-company links, a finding which is also confirmed for France. Nevertheless, the situation in France appears to differ considerably, in that only the STEs constitute the fraction of companies that are able, to a limited extent, to cover their financing needs via additional funds from parent companies. According to the French results, no additional financing contribution of a large net inter-group borrowing position was found for MEs. But in this context it has to be taken into account that, according to the accounting regulations of the Fourth EC Directive, creditors and debtors to group and associated companies also contain trade creditors and debtors. Within the French PCG a different rule has been adopted, but these differences have been adjusted in this study by regrouping the items (see chapter on accounting harmonization). Therefore, the findings probably reflect, for both France and Germany, a policy of increased outsourcing by larger companies in favour of smaller ones. A further essential country-specific difference in the financing patterns of the companies under review becomes immediately evident when WUDGH FUHGLWRUV in relation to the balance sheet total are considered. According to the median, this alternative financing source was of particular importance for French companies, whose share of trade credits in the balance - 102 -

sheet total amounted to roughly 23 %, which is more than twice as high as total French bank debt. In comparison to their French counterparts, inter-industry lending of German businesses was distinctly lower. With a share in the balance sheet total of only roughly 12 %, this proportion amounts to one-half times the respective French values. This finding appears to be in line with the results found for short-term bank debt, as one can assume that if companies find it difficult to obtain credit from banks, they will attempt to secure more favourable or extended credit terms from suppliers (Dietsch and Kremp, 1998). Nevertheless, trade creditors also constitute a major source for covering the financing needs of German manufacturing corporations, notably for the smaller ones. In addition, a similar size-specific graduation of the ratios can be observed for both French and German manufacturing businesses, ranging from 25 % for French STEs and 16 % for their German counterparts, whereas only 13 % and 6 % respectively are recorded for the LTEs in the two countries (at the end of the period considered). Thus, the results described confirm that the importance of commercial credit varies substantially according to firm size. As far as the overall trends of commercial indebtedness are concerned, the median ratios show a significant reduction in accounts payable. That perhaps mirrors the corporationss response to the emerging weakening of economic activity in the two countries in the early nineties, as the share of trade creditors in the balance sheet total dropped noticeably, irrespective of which size class or which statistical parameter is under review. This tendency, which has been regularly observed for recessional phases in the past, is primarily based on the fact that in such phases enterprises are often subject to greater pressure from suppliers to settle their accounts quickly, whereas they, in turn, attempt to call in their claims on customers as rapidly as possible. On the other hand, this may also be seen as a sign of a growing counterparty risk in Germanyss case (Deutsche Bundesbank, 1997). In 1991 a sharp rise in German corporate insolvencies occurred. It might be supposed that this led firms to a more cautious granting of credit terms to business partners.

- 103 -

)LJXUH 
median by size 29.0 27.0 25.0 23,0 21.0 19.0 17.0 15.0 13.0 11.0 9.0 7.0 5.0 1987
UhqrprqvhyyvhivyvvrBrh

1988 1 to 19

1989 20 to 99

1990 100 to 499

1991

1992 500 to 1999

1993 >= 2000

1994 Total

1995

median by size

UhqrprqvhyyvhivyvvrAhpr

29.0 27.0 25.0 23.0 21.0 19.0 17.0 15.0 13.0 11.0 9.0 7.0 5.0 1987

1988 1 to 19

1989

1990 20 to 99

1991 100 to 499

1992

1993

1994 >= 2000

1995 Total

1996

500 to 1999

- 104 -

)LJXUH 
median by size -2.0 -3.0 -4.0 -5.0 -6.0 -7.0 -8.0 -9.0 -10.0 -11.0 -12.0 1987
IrihyhprshqrprqvhyyvhivyvvrBrh

1988 1 to 19

1989 20 to 99

1990 100 to 499

1991

1992 500 to 1999

1993 >= 2000

1994 Total

1995

median by size -2.0 -3.0 -4.0 -5.0 -6.0 -7.0 -8.0 -9.0 -10.0 -11.0 -12.0 1987

IrihyhprshqrprqvhyyvhivyvvrAhpr

1988 1 to 19

1989

1990 20 to 99

1991 100 to 499

1992 500 to 1999

1993

1994 >= 2000

1995 Total

1996

- 105 -

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FDSDELOLW\ RI WKH FODLPV DIIHFWHG E\ WKH JHQHUDO DQWLFLSDWRU\ DVVLJQPHQW WR EH VXIILFLHQWO\ LQGLYLGXDOLVHG LH XQDPELJXRXVO\ GHILQDEOH ([SDQGHG UHVHUYDWLRQ RI RZQHUVKLS tHUZHLWHUWHU (LJHQWXPVYRUEHKDOWt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t$XVVRQGHUXQJt EXW D ULJKW WR VHSDUDWH VDWLVIDFWLRQ IURP WKH DVVHW t$EVRQGHUXQJt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tVPDOO SULQWt RI FRQWUDFWV E 5HVHUYDWLRQ RI RZQHUVKLS LQ )UDQFH 6LQFH WKH LQVHUWLRQ RI WKH UHVHUYDWLRQ RI RZQHUVKLS LQWR )UHQFK LQVROYHQF\ ODZ LQ  WKLV OHJDO FRQFHSW KDV EHFRPH PRUH DQG PRUH ZLGHVSUHDG DQG LV LQFUHDVLQJO\ EHLQJ LQFRUSRUDWHG LQWR WKH JHQHUDO WHUPV DQG FRQGLWLRQV RI EXVLQHVV RI )UHQFK ILUPV 7KH ,QVROYHQF\ /DZ $PHQGPHQW JUDQWV WKH VHOOHU RI WKH REMHFW XQGHU UHVHUYDWLRQ  LUUHVSHFWLYH RI KLV ULJKW WR UHFRYHU\ LQ WKH HYHQW RI MXGLFLDO FDQFHOODWLRQ RI WKH VDOH tUpVROXWLRQ MXGLFLDLUH GH OD YHQWHt DQG KLV ULJKW RI UHWHQWLRQ  D ULJKW WR KDYH WKH REMHFW LQ TXHVWLRQ VHSDUDWHG IURP WKH HVWDWH LQ WKH HYHQW RI WKH SXUFKDVHUsV EDQNUXSWF\ VLPSOH UHVHUYDWLRQ RI RZQHUVKLS 6R IDU WKH FRQFHSWV RI H[WHQGHG RU H[SDQGHG UHVHUYDWLRQ RI RZQHUVKLS DV WKH\ KDYH EHHQ GHYHORSHG LQ *HUPDQ ODZ DUH XQNQRZQ LQ WKH )UHQFK OHJDO V\VWHP 7KH YDOLGLW\ RI WKH UHVHUYDWLRQ RI RZQHUVKLS LQ )UDQFH LV VXEMHFW WR D QXPEHU RI FRQGLWLRQV 7KH FODXVH PXVW EH DJUHHG LQ D GRFXPHQW DQG EH NQRZQ WR WKH SXUFKDVHU QRW ODWHU WKDQ ZKHQ WKH JRRGV DUH GHOLYHUHG LH WKH SXUFKDVHU PXVW EH FRJQLVDQW RI WKH FODXVH DQG GHFODUH KLV WDFLW DSSURYDO UHTXLUHPHQW RI FRQVHQW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tHQ QDWXUHt DW WKH SXUFKDVHU $Q\ FRPSRXQGLQJ EOHQGLQJ DQG PL[LQJ ZLWK RWKHU SURGXFWV UHJXODUO\ OHDGV WR WKH ORVV RI WKH VHOOHUsV ULJKW RI UHVHUYDWLRQ RI RZQHUVKLS LI LW LV QRW SRVVLEOH WR VHSDUDWH WKH REMHFW VXSSOLHG IURP WKH SURFHVVHG SURGXFW ZLWKRXW GDPDJLQJ LW 7KH SUREOHP RI WKH LGHQWLW\ RI WKH REMHFW VROG XQGHU UHVHUYDWLRQ FDQQRW EH FLUFXPYHQWHG E\ WKH DJUHHPHQW RI DQ H[WHQGHG UHVHUYDWLRQ RI RZQHUVKLS  ZKLFK LV WKH HVVHQWLDO GLIIHUHQFH IURP WKH VLWXDWLRQ XQGHU *HUPDQ ODZ +RZHYHU $UWLFOH  RI WKH )UHQFK ,QVROYHQF\ /DZ GRHV VWLSXODWH WKDW LQ WKH HYHQW WKDW WKH REMHFW VROG XQGHU UHVHUYDWLRQ LV UHVROG E\ WKH SXUFKDVHU WKH VXSSOLHU PD\ FODLP IURP WKH WKLUGSDUW\ SXUFKDVHU WKDW SRUWLRQ RI WKH SXUFKDVH SULFH ZKLFK KDV QRW EHHQ SDLG E\ WKH WLPH WKH LQVROYHQF\ SURFHHGLQJV DUH LQLWLDWHG

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F ,PSOLFDWLRQV IRU WUDGH FUHGLW LQ WKH WZR FRXQWULHV 2QH FRXOG WKLQN WKDW WKH UHVHUYDWLRQ RI WKH RZQHUVKLS FODXVH RSHUDWHV DV D JXDUDQWHH JLYHQ E\ WKH GHEWRU WR WKH FUHGLWRU $FFRUGLQJ WR )UHQFK EDQNHUV WKH LPSURYHPHQW DQG HQODUJHPHQW RI WKH UHVHUYDWLRQ RI RZQHUVKLS PLJKW HQFRXUDJH WKH GHYHORSPHQW RI WUDGH FUHGLW WR WKH GHWULPHQW RI EDQN OHQGLQJ VLQFH LW FRXOG UHGXFH WKH JXDUDQWHH RI FUHGLW LQVWLWXWLRQV DQG HVSHFLDOO\ IDFWRULQJ FRPSDQLHV &1&7 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 7KH H[WHQVLRQ RI WKH VFRSH RI WKHVH UHVHUYDWLRQ FODXVHV XQGHU *HUPDQ ODZ JLYLQJ WKH FUHGLWRU GLUHFW ULJKWV RI DFFHVV WR WKH SURFHVVHG SURGXFW DQG WKH FODLP DULVLQJ IURP UHVDOH SURYLGH YHU\ HIIHFWLYH HFRQRPLF OHYHUDJH IRU FRPSHOOLQJ GHIDXOWLQJ GHEWRUV WR FRPSO\ ZLWK WKH FRQWUDFWXDO WHUPV RI SD\PHQW

In order to clarify the net contribution of inter-industry credit to the financing scope of companies, special attention has to be paid to the EDODQFH RI WUDGH FUHGLWRUV DQG WUDGH GHEWRUV.10 As the median figures show for France, enterprises and their customers alike made extensive use of trade crediting practices, so that all size categories displayed a significant net lending balance, thus causing additional financing gaps ranging between 8 and 10 percentage points. The only exception to that rule are LTEs, which were able to increase their trade debtors during the nineties, so that at the end of the period under review a negative balance of only 3 percentage points was observed. By contrast, the figures for German manufacturing seem to tell a markedly different story. For German businesses, in total, the additional financing needs resulting from a deficitary net balance of receiving trade credit from suppliers and granting payment extensions to customers amounted only to three-quarters of the respective French ratios. But even more importantly, the small German enterprises were those which evidently had to carry the smallest financial burden stemming from net lending (although this advantage was significantly reduced from 1991 on), whereas in France the financial situation of the largest companies was clearly by far least affected. Despite the fact that perceptible differences in the respective financing practices in the two countries undoubtedly have to be conceded, it might be concluded that - as regards the net effect - the relative importance of trade crediting is less outstanding for French firms than is often assumed in literature (see for example Boissonade and Palu, 1992). Nevertheless, trade creditors play a more important role in the corporate finance system of France by

10 This ratio is calculated as trade creditors (recorded on the liabilities side) less trade debtors (shown on the assets side) including the group and associated companies part of this item.

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performing the function of a short-term financing buffer, a function which in Germany is said to be performed primarily by short-term bank loans. In order to explain the observed cross-country differences in trade crediting, two aspects appear to be of significance. Firstly, the very far-reaching reservation of ownership provisions under German property law strictly protecting the interests of creditors lead to a situation in which exceeding the period allowed for payment becomes particularly dangerous for the debtor. The special judicial regulations of an expanded and extended reservation of ownership clause (terweiterter und verlngerter Eigentumsvorbehaltt) impose a considerable risk of incurring severe and far-reaching adverse consequences on borrower firms, which tends considerably to stimulate their payment behaviour (see %R[ ). In addition, the practice of granting cash discounts - as a rule constituting an integral part of the normal general terms and conditions (tAllgemeine Geschftsbedingungent) of sales contracts - renders this source of financing particularly expensive, as purchase price reductions of 2 % or 3 %, conditional on a direct payment, are granted instead of credit extensions of 10 or 30 days. The granting of cash discounts is a common practice in Germany, whereas it appears to be less customary in France. In addition, it has to be conceded that the terms for granting trade credit tend to differ substantially between the two countries, as according to the available statistical information (see Creditreform, 1996) the regular period allowed for payment is on average three times as high in France as it is in Germany (74 days versus 25 days allowed). That difference alone, which constitutes a typical disparity in conventions, accounts for a substantial part of the high stock figures for trade creditors and debtors in France.11  &URVVFRXQWU\ GLIIHUHQFHV LQ SURYLVLRQV A further stylised fact of the respective of corporate financing in the two countries is to be found in the differing importance of SURYLVLRQV IRU ULVNV DQG FKDUJHV as a method of corporate financing. The findings for both the weighted mean and the median of that ratio indicate that these funds are of particular importance for the financing of German firms, notably the larger ones, whereas they generally only play a marginal role for French businesses. According to the median, for French businesses this ratio was almost zero or only very small (0 % versus 4 %) and, as regards the weighted mean, it amounted also to a very small proportion of the balance sheet total (2 % versus 4 %). Unlike in France, provisions for risks and charges constitute a significant stabilising element in west German corporate financing, as a large part of these funds (e.g. provisions for pensions) are available over the long-term to the firms in the context of their internal financing. For Germany
11 These facts are disregarded by a recent study on trade credit in Germany and France (Breig and FurlongWilson, 1996). Furthermore, the authors assume that FIBEN information of the Banque de France can be sold to non-financial firms by banks, something which is strictly forbidden by contract. Therefore, the assumptions and the conclusions of this study seem to be virtually inappropriate to explain the different use of trade credit in the two countries.

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the weighted mean figures point to a share of provisions in the balance sheet total of approximately 40 %. Owing to the considerable concentration of provisions in the segment of LEs and LTEs, the median figures show that an average manufacturing corporation did not accumulate more than 12 % of its balance sheet total in form of transfers to provisions, of which only a minor part consisted of provisions for pension obligations. However, as measured by the median of that ratio, a considerable proportion of provisions is recorded for the largest corporations amounting to roughly 32 %, indicating that this financing source was even larger than that of own funds or total indebtedness. This finding provides an illuminating insight into the nearly exhaustive degree of financial autonomy of that particular type of German enterprise. The fairly visible dispersions according to size in the German figures virtually seem to reflect different material conditions for setting up provisions for risk and charges. For smaller businesses (corporations in the size segment with up to 499 employees), provisions for pensions, notably, are of little significance (0 % to 5 %), as these companies are apparently not diversified enough to establish employer-based pension systems as instruments of corporate financing. This might provide one important explanation for the fact that the strategy of extensive risk provisioning tends to be more or less concentrated in the two upper size classes of German manufacturing firms. But with respect to the observed large cross-country differences in the relative importance of provisions, the crucial question that remains to be clarified is why corporate policy in Germany has pursued a markedly different approach from that of French businesses on this issue. An important factor might be the different customs with regard to setting up provisions for pensions and the different degree of dissemination of company-based retirement pension schemes in the two countries. Whereas in France company-based supplementary old age pension schemes play only a minor role, they have a long tradition in Germany, encouraged by special tax regulations. In France, where there is no tax deductibility for transfers to pension provisions, indirect pension arrangements tend to predominate. Besides the differences in tax deductibility and the different customs in the use of direct pension obligations, substantial differences in the accounting treatment of provisions also have to be taken into account (for details see &KDSWHU ). Under German law no distinction is made between accrued liabilities and provisions, so that relatively certain future obligations, too, have to be covered by provisions, whereas in France they are normally disclosed as liabilities (for example, tax liabilities). In addition, a number of differences were observed with respect to the question of whether it is permissible to disclose certain kinds of provisions and whether their disclosure should be mandatory or optional, e. g. provisions for liabilities to third parties are generally mandatory in Germany, which is not the case in France. Further important differences exist in the valuation of provisions. Whereas in France clear rules are defined for the determination of the amount to be

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)LJXUH 
median by size
QvvsvxhqpuhtrhyyvhivyvvrBrh

30.0 27.0 24.0 21.0 18.0 15.0 12.0 9.0 6.0 3.0 0.0 1987

1988 1 to 19

1989 20 to 99

1990 100 to 499

1991

1992 500 to 1999

1993 >= 2000

1994 Total

1995

median by size

QvvsvxhqpuhtrhyyvhivyvvrAhpr

30.0 27.0 24.0 21.0 18.0 15.0 12.0 9.0 6.0 3.0 0.0 1987

1988

1989 1 to 19

1990 20 to 99

1991 100 to 499

1992

1993

1994 >= 2000

1995 Total

1996

500 to 1999

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)LJXUH 
median by size
QvvsrvhyyvhivyvvrBrh

16.0

14.0

12.0

10.0

8.0

6.0

4.0

2.0

0.0 1987

1988 1 to 19

1989 20 to 99

1990 100 to 499

1991

1992 500 to 1999

1993 >= 2000

1994 Total

1995

provisioned, German regulations leave more room for discretionary latitude of the firms, as accounting law only prescribes that provisions have to be stated at the amount required, based on sound business judgement. To sum up, it may be assumed that, owing to the manifold options and considerable discretionary latitude for the disclosure and valuation of provisions, larger German corporations probably pursued such an approach of forming provisions rather than setting up reserves at least in part to reduce their tax burden on a temporary basis, whereas French firms were able to achieve the same or even a larger relief by following a policy of profit retention.

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6WUXFWXUH RI FRPSDQ\EDVHG VXSSOHPHQWDU\ ROG DJH SHQVLRQ LQVXUDQFH VFKHPHV LQ *HUPDQ\ 
Benefit funds 8% Direct insurance 12% Pension provisions 58%

Pension funds 22%

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12 Where they do exist they largely take the form - as in the US - of pension funds operated outside of and separate from the enterprise.

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DJUHHPHQW VLQFH WKH LQWURGXFWLRQ RI WKH )RXUWK (& 'LUHFWLYH WKLV KDV EHHQ PDQGDWRU\ ZKHUHDV EHIRUH LW ZDV RSWLRQDO LQ RUGHU WR HDUPDUN ZLWKLQ WKH EDODQFH VKHHW D VHSDUDWH DPRXQW RI DVVHWV VXIILFLHQW WR VDWLVI\ WKH HPSOR\HHVs IXWXUH SHQVLRQ HQWLWOHPHQWV 7KH DPRXQW RI WKH SHQ VLRQ SURYLVLRQV LV FDOFXODWHG DV WKH DFWXDULDOO\ FRPSXWHG SUHVHQW YDOXH RI WKH SHQVLRQ EHQHILWV SURPLVHG E\ WKH HQWHUSULVH 7KH $FW ,PSURYLQJ (PSOR\HUEDVHG 3HQVLRQ 6FKHPHV &RPSDQ\ 3HQVLRQ $FW ZKLFK ZDV SDVVHG LQ  ODLG GRZQ FHUWDLQ PLQLPXP VWDQGDUGV IRU VXFK SHQVLRQ EHQHILWV SURYLGHG E\ WKH HPSOR\HU .H\ SRLQWV RI WKHVH VWDWXWRU\ UHTXLUHPHQWV ZHUH WKH SULQFLSOH RI QRQIRUIHLWDELOLW\ PLQLPXP UHTXLUHPHQW WKH FODLPDQW PXVW EH DW OHDVW  \HDUV ROG DQG WKH SHQVLRQ FRPPLWPHQW PXVW KDYH H[LVWHG IRU DW OHDVW WHQ \HDUV RU DOWHUQDWLYHO\ WKH FODLPDQW PXVW KDYH EHHQ HPSOR\HG E\ WKH ILUP IRU DW OHDVW WZHOYH \HDUV DQG WKH SHQVLRQ FRPPLWPHQW PXVW KDYH H[LVWHG IRU DW OHDVW WKUHH \HDUV WKH VDIHJXDUGLQJ RI WKH SHQVLRQ HQWLWOHPHQW LQ WKH HYHQW RI WKH HQWHUSULVHsV LQVROYHQF\ WKURXJK DQ LQVROYHQF\ LQVXUDQFH DUUDQJHPHQW SHQVLRQ JXDUDQWHH IXQG DQG WKH SURKLELWLRQ RI RIIVHWWLQJ RWKHU SHQVLRQ SD\PHQWV DJDLQVW WKH GHILQHG SD\PHQWV RI WKH HPSOR\HU EDVHG VXSSOHPHQWDU\ SHQVLRQ LQVXUDQFH VFKHPH tQRQGHGXFWLELOLW\t E $FFRXQWLQJ IRU DQG YDOXDWLRQ RI SHQVLRQ SURYLVLRQV 6LQFH  SHQVLRQ FRPPLWPHQWV PDGH E\ WKH HPSOR\HU WR WKH HPSOR\HH GLUHFWO\ KDYH WR EH VKRZQ LQ ERWK WKH FRPPHUFLDO EDODQFH VKHHW DQG WKH WD[ EDODQFH VKHHW DW WKHLU SUHVHQW YDOXH ZKLFK PXVW EH FRPSXWHG DFFRUGLQJ WR DFWXDULDO SULQFLSOHV LH WDNLQJ LQWR DFFRXQW PRUWDOLW\ UDWHV LQYDOLGLW\ ULVNV HWF :KHUHDV WKH FRPPHUFLDO EDODQFH VKHHW DOORZV WZR GLIIHUHQW PHWKRGV RI FRPSXWLQJ WKH DSSURSULDWH OHYHO RI SURYLVLRQV  WKH JRLQJFRQFHUQ YDOXH PHWKRG DQG WKH SUHVHQWGD\ YDOXH PHWKRG  DQG SHUPLWV D UDQJH RI    DV WKH LPSXWHG LQWHUHVW UDWH IRU GLVFRXQWLQJ WKH SUHVHQW YDOXH WKH WD[ DFFRXQWLQJ UXOHV VWLSXODWH WKH XVH RI WKH JRLQJFRQFHUQ YDOXH PHWKRG XVLQJ DQ LPSXWHG LQWHUHVW UDWH RI   ,Q FRPSXWLQJ WKH UHTXLUHG DPRXQW RI SURYLVLRQV WKH JRLQJFRQFHUQ YDOXH PHWKRG ZKLFK KDV WR EH XVHG IRU WD[ DFFRXQWLQJ SXUSRVHV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 VKLIWV D FRQVLGHUDEOH SDUW RI WKH IRUPDWLRQ RI SURYLVLRQV IRUZDUG WR WKH WLPH EHIRUH WKH SHQVLRQ FRPPLWPHQW DFWXDOO\ EHJLQV

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F 6LJQLILFDQFH IURP WKH HQWHUSULVHsV SRLQW RI YLHZ 2QO\ WR WKH H[WHQW WKDW WKH SHQVLRQ SURYLVLRQV XVLQJ WKH JRLQJFRQFHUQ YDOXH PHWKRG VWLSXODWHG IRU WD[ DFFRXQWLQJ SXUSRVHV DUH FRPSXWHG RQ WKH EDVLV RI WKH FXUUHQWO\ YDOLG IRU WD[ SXUSRVHV LPSXWHG LQWHUHVW UDWH   GR WKH\ FRQVWLWXWH D WD[GHGXFWLEOH H[SHQVH DQG VR FRUUHVSRQGLQJO\ UHGXFH WKH DVVHVVPHQW EDVH IRU LQFRPH WD[ FRUSRUDWLRQ WD[ DQG WUDGH HDUQLQJV WD[ 7KH ODWHU SD\PHQW RI WKH SHQVLRQ WDNHV WKH IRUP RI D UHOHDVH RI WKH SHQVLRQ SURYLVLRQV DQG KHQFH KDV QR HIIHFW RQ WKH SURILW +HQFH SHQVLRQ SURYLVLRQV DOORZ HQWHUSULVHV WR LQWHUQDOO\ DFFXPXODWH DPRXQWV GHVWLQHG IRU H[SHQGLWXUH ORQJ EHIRUH WKH\ EHFRPH GXH DQG WKHUHE\ UHGXFH WKH VWDWHG SURILW DGYDQFH WD[ UHGXFWLRQ DW WKH VDPH WLPH DOORZLQJ WKH DFFXPXODWHG UHVRXUFHV WR EH XVHG IUHHO\ E\ WKH HQWHUSULVH RYHU WKH ORQJWHUP DV DQ LQWHUQDOO\ JHQHUDWHG FDVK IORZ ILQDQFLQJ HIIHFW WKURXJK UHLQYHVWPHQW RI WKH IXQGV ZLWKLQ WKH HQWHUSULVH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 DQG VHFRQGO\ D UHFHQW OHJDO UXOLQJ E\ WKH )HGHUDO /DERXU &RXUW ZKLFK H[WHQGHG WKH FRYHUDJH UHTXLUHPHQWV E\ REOLJLQJ HQWHUSULVHV WR DGMXVW HPSOR\HU EDVHG SHQVLRQ SD\PHQWV WR WKH FKDQJLQJ FRVW RI OLYLQJ HYHU\ WKUHH \HDUV LQ IXWXUH  ZLWKRXW HQD EOLQJ HQWHUSULVHV WR DGMXVW IRU WKLV G\QDPLVDWLRQ RI H[SHQGLWXUH LQ DGYDQFH LQ WKHLU IRUPDWLRQ RI SURYLVLRQV

 7KH DVVHWV VLGH As mentioned, a comparison of the financing structures would remain particularly rudimentary if the differences in the assets structures were omitted as, according to Williamson, the financing behaviour of companies notably depends on their respective financing needs emerging from the asset conversion cycle. In contrast to the sharply differentiated liabilities structures of manufacturing enterprisess balance sheets in Germany and France, the observable structural differences as regards fixed and current assets are clearly less pronounced. According to the overall weighted mean, substantial disparities between the two countries are manifest only for trade debtors, a finding which confirms the

- 115 -

stylised facts, described above, for the liabilities side and as far as debtors to group and associated companies are concerned.  6WUXFWXUHV DQG WUHQGV RI IL[HG DVVHWV Nevertheless, a breakdown of the components of the assets side and a comparison of the median figures display less structural convergence between the two countries than that observed by contrasting the weighted means of the global positions. As far as tangible fixed assets are concerned, no pronounced country-specific differences can be observed initially, and the size classes likewise show a corresponding graduation. Only the stock of tangibles recorded for German manufacturing corporations was slightly larger (by approximately 2 percentage points) than was observed for their French counterparts. This difference can perhaps be explained by the divergent mix of industrial sectors in the databases of the Banque de France and the Bundesbank. Whereas the datasets for Germany are predominantly composed of companies producing intermediate and capital goods, the French samples are more homogeneous with respect to the coverage of firms belonging to non-durable and durable consumer goods industries. Furthermore, the figures derived indicate that the firms in the two countries more or less maintained their stocks of tangible fixed assets in relation to the balance sheet total, with the exception of larger businesses, which significantly reduced their capital stock in the period under review. But this tendency has not been continuous in the two countries, as tangible fixed assets first increased slightly up to 1991/92 - except in the case of German LTEs, which tend to display a relatively continuous strategy of reducing corporate investment in production capacity. There are considerable difficulties in interpreting these developments. As far as Germany is concerned, the modest dynamism of asset structures is at least partly attributable to the considerable expansion of capacity in the wake of the unification boom, whereas for France the stimuli imparted by the upswing of the business cycle temporarily strengthened investment behaviour. But following the downturn in business activity and the substantial deterioration of the earnings situation, a significant drop in enterprisess fixed assets investment activities can be observed. In general, it may be assumed that the longterm trend of tangibles mirrors not only the uncertain investor expectations at the end of the period, but to some extent also the growing tendency towards external growth. Especially large corporations evidently placed greater emphasis on the acquisition of investments and participating interests. It seems that a large proportion of manufacturing enterprises decided in the first half of the nineties - not least owing to the unfavourable profitability situation to channel a major part of their cash flow into the acquisition of

- 116 -

)LJXUH 
TprshrBrh

weighted mean 100%

80%

60%

40%

20%

0% 1987 1988 1988 1989 1989 1990 1990 1991 1991 1992 1992 1993 1993 1994 StocksLiquidities 1994 1995

Intangible fixed assets Group&Associated comp.

Tangible fixed assets Commercial debtors

Financial fixed assets Other debtors

weighted mean 100%

TprshrAhpr

80%

60%

40%

20%

0% 1987 1988 1988 1989 1989 1990 1990 1991 1991 1992 1992 1993 1993 1994 Stocks Liquidities 1994 1995 Intangible fixed assets Group&Associated comp. Tangible fixed assets Commercial debtors Financial fixed assets Others debtors

- 117 -

financial assets, especially participating interests, rather than to invest in new tangible fixed assets. Furthermore, the results for French businesses tend to provide some indication of the significance of a strategy aimed at stepping up the level of own funds by cutting back investment in order to overcome their solvency constraints and maintain their profitability during the last recession (see, for example, Paranque, 1993; Boissonade and Tournier, 1996). As described in the previous section, it was necessary for both banks and enterprises to improve their own funds, owing to the obvious risks resulting from the increased uncertainty of economic conditions during the nineties. Owing to the more extensive disclosure options for intangibles provided by French PCG, intangibles in relation to the balance sheet total had a slightly larger weight in France than in Germany. This is especially true for STEs and SEs, which on average do not record any intangibles in Germany, but in France record a similar proportion as LTEs. Irrespective of the observed disparities, intangibles are obviously only of minor importance in the two countries, which suggests that, despite the existing differences in accounting latitude, firms apparently tend to pursue a quite similar accounting policy vis--vis the capitalisation of expenditures. The reverse structural shifts, which have been observed within the ratio of tangible fixed assets, are observed when measuring ILQDQFLDO IL[HG DVVHWV as a proportion of the balance sheet total. As described in the previous section, the findings confirm the existence of a comparable strategy of external growth in both countries. For an increasing proportion of the larger French and German manufacturing corporations, notably LEs and LTEs, the acquisition of participating interests frequently tends to serve as an alternative to investment in capacity extensions to own plants. Concentration among competitors (e. g. in the automobile, chemicals and electronic industries) and the need for a rapid pay-back for investment have encouraged larger businesses to acquire existing capacity rather than extending their own capacities. This alternative external growth strategy, mirroring the intensified globalisation efforts and growing tendencies towards outsourcing, was particularly pronounced in the case of LTEs, whose financial fixed assets ratio increased sharply from 6 % in 1987 to 14 % in 1995 (France) and from 7 % to roughly 16 % (Germany). This tendency was caused almost exclusively by a substantial rise in shares and participating interests, which doubled in the entire period under review. By contrast, for businesses in the size class of 500 to 1999 employees, financial assets also grew, but only at a very moderate pace (by approximately 2 % in both France and Germany).

- 118 -

)LJXUH 
UhtviyrsvrqhrhyhrBrh

median by size 26.0

24.0

22.0

20.0

18.0

16.0

14.0

12.0

10.0 1987

1988 1 to 19

1989 20 to 99

1990 100 to 499

1991

1992 500 to 1999

1993 >= 2000

1994 Total

1995

median by size

UhtviyrsvrqhrhyhrAhpr

26.0

24.0

22.0

20.0

18.0

16.0

14.0

12.0

10.0 1987

1988

1989 1 to 19

1990 20 to 99

1991 100 to 499

1992

1993

1994 >= 2000

1995 Total

1996

500 to 1999

- 119 -

)LJXUH 
DhtviyrsvrqhrhyhrBrh

median by size 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 1987

1988 1 to 19

1989 20 to 99

1990 100 to 499

1991

1992 500 to 1999

1993 >= 2000

1994 Total

1995

median by size 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 1987

DhtviyrsvrqhrhyhrAhpr

1988

1989 1 to 19

1990 20 to 99

1991 100 to 499

1992

1993

1994 >= 2000

1995 Total

1996

500 to 1999

- 120 -

)LJXUH 
median by size
AvhpvhysvrqhrhyhrBrh

16.0

14.0

12.0

10.0

8.0

6.0

4.0

2.0

0.0 1987

1988 1 to 19

1989 20 to 99

1990 100 to 499

1991

1992 500 to 1999

1993 >= 2000

1994 Total

1995

median by size

AvhpvhysvrqhrhyhrAhpr

16.0

14.0

12.0

10.0

8.0

6.0

4.0

2.0

0.0 1987

1988 1 to 19

1989

1990 20 to 99

1991 100 to 499

1992 500 to 1999

1993

1994 >= 2000

1995 Total

1996

- 121 -

 'LIIHUHQFHV LQ FXUUHQW DVVHWV As far as current assets are concerned, the signs of advanced concentration and closer cross-shareholdings in the French and German manufacturing sector are reflected in an increase in the ratio debtors to group and associated companies in relation to total assets. As expected, the requested funds for inter-group financing were almost exclusively provided by larger businesses in the two upper size classes (500 employees and more), as that kind of globalised financial strategy appears to be primarily a characteristic of large groups and holdings providing finance to their subsidiaries. This situation applies above all in the case of German LTEs, as for these businesses lending to subsidiaries was fairly expansionary. With a share in the balance sheet total of roughly 11 %, it was distinctly higher than the ratio of their French counterparts in that respective size class (less than 9 % in 1995). According to the aforementioned statement, such behaviour does not appear to be relevant to smaller businesses; accordingly, their medians - as expected - only display minor or even no amounts in the two countries. A further clearly visible difference in the assets structure of French and German manufacturing corporations was found in the respective share of inventories in the balance sheet total. West German manufacturing firms in total recorded a distinctly larger stock of raw materials, consumables, finished goods and work in progress than their French counterparts. That can perhaps be explained in this case, too, by the different industry mix of the databases, as the more capital-intensive production units of capital goods industries tend to accumulate larger amounts of stocks than do consumer goods industries. In addition, it cannot be excluded that differences in accounting law might have influenced that difference, owing to the fact that the German tHGBt - in comparison to the tPCGt defines an extended upper limit for the valuation of production costs (see &KDSWHU  on accounting for details). Besides this observation, the same size-specific patterns are found for the inventories ratio in Germany and France, with the sole exception being that, for French SMEs, the decline in stocks was slightly more pronounced than for the respective German companies, which expanded their stocks from 1992/93 on, to some extent involuntarily. In general, large companies were able to curtail their stocks of own products and goods for resale more sharply, particularly to the detriment of the medium-sized firms which predominantly constituted their suppliers. This tendency can be observed in all major industrialised countries, reflecting the tendency of large businesses to shift the storage of inventories to suppliers by adopting new approaches to the organization of production (e.g. the just-in-time approach). However, these findings highlight the fact that,

- 122 -

)LJXUH 
9rithqhpvhrqphvrhyhrBrh

median by size 12.0 11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 1987

1988 1 to 19

1989 20 to 99

1990 100 to 499

1991

1992 500 to 1999

1993 >= 2000

1994 Total

1995

median by size 12.0 11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 1987

9rithqhpvhrqphvrhyhrAhpr

1988 1 to 19

1989

1990 20 to 99

1991 100 to 499

1992 500 to 1999

1993

1994 >= 2000

1995 Total

1996

- 123 -

)LJXUH 
median by size
DrvrhyhrBrh

32.0

30.0

28.0

26.0

24.0

22.0

20.0

18.0

16.0 1987

1988 1 to 19

1989 20 to 99

1990 100 to 499

1991

1992 500 to 1999

1993 >= 2000

1994 Total

1995

median by size

DrvrhyhrAhpr

32.0

30.0

28.0

26.0

24.0

22.0

20.0

18.0

16.0 1987

1988

1989 1 to 19

1990 20 to 99

1991 100 to 499

1992

1993

1994 >= 2000

1995 Total

1996

500 to 1999

- 124 -

despite the rationalisation measures taken by companies during the period under review, interdependence between companies has been maintained to the detriment of smaller companies. In particular, companies in a dominant position were able to off-load the cost of managing their inventories onto customers and/or their suppliers. The effect of this dominance can also be seen in the fact that the proportion of trade debtors (excluding group and associated companies) fell to a lower extent in the case of French companies with fewer than 500 employees than for other companies, whatever the indicator used. This implies that large companies are better able to manage credit allowed to customers than are medium-sized and small companies (Kremp and Bardes, 1997). But in addition, the observed deterioration in profitability evidently led to additional pressure on stockbuilding, which might explain the fact that SMEs, too, successfully sought to reduce their inventories in the early nineties in line with the current or anticipated level of production in order to reduce their respective financing needs. According to recent research, inventories owing to their easy adjustability and low adjustment costs - are the major response parameters of companies during recessions (Carpenter et al., 1994). As described in the previous chapter on trade creditors, the financial burden on French manufacturing firms resulting from providing WUDGH FUHGLW to customers was far more extensive than for their German counterparts. A significant difference in the trade debtors to balance sheet total ratio of approximately 15 percentage points was recorded for all size classes, taken together. Despite the observed large cross-country differences in the level of that ratio, the same size-specific graduation is found for Germany and France, pointing to the fact that smaller businesses - owing to their weaker market power - had to sell merchandise more frequently on credit, rather than requiring direct cash payment. But as their sales-related lending activities were compensated to a large extent by corresponding recourse borrowing from suppliers, the additional financing requirements in the two countries were markedly lower. Nevertheless, a considerable financing gap remained in both the French and the German manufacturing sector as more trade credit was provided to customers than received from supplier finance relationships. This was especially true for SEs, MEs and LEs, whereas both LTEs and STEs in the countries under review were able to off-load their trade finance requirements on to their respective suppliers to a great extent. In principle, corporations could use the reduction of OLTXLGLWLHV as a compensation strategy to cope with growing financial pressure during recessionary phases. However, - depending on the financial strategy pursued - liquidities could also constitute an important source for maintaining the financial flexibility of a firm, as these funds provide means to react

- 125 -

)LJXUH 
median by size
8rpvhyqrihqrqrihyhrBrh

35.0

32.0

29.0

26.0

23.0

20.0

17.0

14.0

11.0 1987

1988 1 to 19

1989 20 to 99

1990 100 to 499

1991

1992 500 to 1999

1993 >= 2000

1994 Total

1995

median by size

8rpvhyqrihqrqrihyhrAhpr

35.0

32.0

29.0

26.0

23.0

20.0

17.0

14.0

11.0 1987

1988 1 to 19

1989

1990 20 to 99

1991 100 to 499

1992

1993

1994 >= 2000

1995 Total

1996

500 to 1999

- 126 -

)LJXUH 
median by size 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 1987
GvvqvvrhyhrBrh

1988 1 to 19

1989 20 to 99

1990 100 to 499

1991

1992 500 to 1999

1993 >= 2000

1994 Total

1995

median by size 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 1987

GvvqvvrhyhrAhpr

1988

1989 1 to 19

1990 20 to 99

1991 100 to 499

1992

1993

1994 >= 2000

1995 Total

1996

500 to 1999

- 127 -

immediately to unforeseeable and unusual events in an enterprisess asset conversion cycle. According to Hicks, firms which do not have access to current credit might be forced to maintain a relatively large stock of liquidities in order to maintain their requirements for financial flexibility. If liquidities (both current investment and cash in hand) are measured in relation to the balance sheet total, a subtle but not unimportant difference in the respective financing structures of French and German manufacturing firms becomes evident. There is nothing to suggest that this parameter of enterprisess financial strategy played a significant role for the German manufacturing corporations, as on average a liquidity ratio of barely 2 % was recorded. But in clear contrast to Germany, the larger and relatively stable share of liquidities in the balance sheet of French SMEs (around 5 %) provides some evidence of a strategy of hoarding liquidities according to Hicks. These country-specific findings for liquidities are in line with the respective results for bank borrowing derived in this study. For German smaller businesses it appears to be plausible that, owing to their flexible access to bank loans in the form of permanent credit facilities or general operating loans, there is no need to accumulate considerable amounts of cash and current investment in their balance sheets. Just the opposite tends to be true for their French counterparts, which consistently displayed a very low median proportion of short-term bank loans in their balance sheets. It is logical to assume either that this lower recourse to short-term bank debt is due to the existence of cash, or - an apparently more convincing answer - that the difficulty in obtaining liquidity from banks forces this size segment of companies to hold cash in order to meet their need for financial flexibility (Hicks, 1975; Paranque and RivaudDanset, 1998).

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The starting point of this chapter was to focus on the financing patterns of manufacturing corporations in Germany and France. The results of the descriptive approach clearly show that the capital structures of firms largely diverge, as the different sources of corporate finance tend to play very distinct roles in the industrial sectors of the two countries, thus indicating that the respective systems of corporate finance seem to differ distinctly and systematically. The outstanding differences are: D FRPSOHWHO\ GLYHUJLQJ OHYHO RI RZQ IXQGV FRQVLGHUDEOH DPRXQWV RI SURYLVLRQV DFFXPXODWHG E\ WKH ODUJHU *HUPDQ FRUSRUDWLRQV VLJQLILFDQW GLIIHUHQFHV LQ WKH DFFHVV WR EDQN ORDQV DQG D UHYHUVHG VWUXFWXUH RI VKRUW YHUVXV ORQJWHUP FRPSRQHQWV LQGLFDWLQJ WKDW )UHQFK EDQNV DUH PRUH HQJDJHG LQ - 128 -

LQYHVWPHQWUHODWHG ILQDQFLQJ DFWLYLWLHV ZKHUHDV WKH *HUPDQ EDQNV SULPDULO\ WHQG WR FRYHU WKH ZRUNLQJ FDSLWDO UHTXLUHPHQWV VXEVWDQWLDO GLYHUJHQFLHV ZLWK UHVSHFW WR WKH H[WHQW RI OLTXLGLWLHV FDUULHG LQ WKH EDODQFH VKHHW UHVXOWLQJ IURP GLIIHUHQW VWUDWHJLHV IRU HQVXULQJ ILQDQFLDO IOH[LELOLW\ D GLIIHUHQW OHYHO RI LPSRUWDQFH RI WUDGH FUHGLWRUV DQG WUDGH GHEWRUV DQG ILQDOO\ VLJQLILFDQWO\ GLIIHULQJ OHYHOV RI LQYHQWRULHV As far as Germany is concerned, it becomes directly evident from the findings that the system of corporate finance is diversified into a SME sector and a large enterprise sector which tend to differ fundamentally as regards access to financing sources, the intensity of their use and substitution processes between different financing modes. The financing system adopted by German SMEs could be described as the traditional bank-based model, as a high degree of leverage and bank intermediation are observed coupled with a very low accumulation of own funds. Despite all the efforts aimed at deregulating and improving access to capital markets, especially for small and medium-sized firms, the contribution of capital market-based company finance still tends to be marginal. In contrast to these efforts to strengthen the allocational role of capital markets, a persisting tendency towards increasing intermediation can be observed. This suggests that banks are likely to continue to play a large and very important role in the financing activities of these companies. Bank debt, notably in the form of short-term bank lending, is the most important financing source of these corporations. However, banks not only provide the necessary financial flexibility for managing the asset conversion cycle, by ensuring flexible and almost unlimited access to short-term financing, particularly in the form of overdrafts and general credit facilities, but also advance long-term loans to a considerable extent and thereby facilitate the growth and restructuring processes of their respective client companies. Besides bank loans, trade credit tends to constitute a further major source of flexible short-term financing, but it should be taken into consideration that its net contribution actually remains negative, as larger amounts of credits have to be granted to customers than could be received from suppliers. In addition, an increasing number of businesses belonging to this segment, notably subsidiaries of larger firms, appear to be integrated into the large international financial networks of group or holding companies. In these cases bank intermediation is substituted by a strategy of financial alliance, in which SMEs are able to participate in exploiting group advantages (pooled financial management) and access to international financial markets.

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7DEOH  &RPSDUDWLYH FKDUDFWHULVWLFV RI WKH FRUSRUDWH ILQDQFH V\VWHPV LQ )UDQFH DQG *HUPDQ\
Feature / Country Financial structure Financial autonomy Principal financing sources Type of financing model Role of the banking sector Relationship banks/enterprises Role of capital market Sources of financial flexibility France homogeneous SME sector high internal financing: cash flow, reserves auto economy decreasing through disintermediation procedure-based low for SMEs, but increasing for LEs liquidities, trade creditors very low external financing: bank debts overdraft Germany polarised in: LE sector very high internal financing: cash flow, provisions, reserves auto economy

increasing through still very limited, but still decreagrowing intermediation sing through disintermediation commitment-based very low short-term bank debts, trade creditors commitment-based low, but increasing provisions and reserves

By contrast, the financing structures of the large enterprise segment in Germany is characterised by a high degree of financial autonomy. Neither extensive capital market reliance nor an important dependence on bank crediting can be observed for these enterprises. As far as the largest companies are concerned, an almost complete decoupling from the lending opportunities of the banking sector has been achieved. These businesses have been able to create a kind of internal capital market which almost entirely ensures the necessary funds for the financing of its operating cycle by accumulating comparatively high levels of equity capital and reserves, and, even more importantly, a substantial amount of provisions, which tend to be at least as extensive as own funds. This kind of autonomy-based financial structure is also relevant for the description of the French corporate finance system. Nevertheless, important differences must be noted. While the French SME sector systematically improved its provision with own funds during the period under review, the manufacturing sector as a whole, unlike in Germany, shows considerable homogeneity of financing structures. Furthermore, the data permit the conclusion that the degree of bank dependence appears to be considerably lower for SMEs in France than in Germany, but the process of disintermediation from the banking system is more widespread but far less pronounced than is the case for large German corporations. This is directly linked to the fact that French firms, following a similar pecking-order approach, did not adopt a strategy of forming extensive transfers to provisions, a phenomenon which can be largely explained by the special regulations of tax law. Therefore, their internal capital market appears to be substantially smaller. On the other hand, the massive efforts undertaken to rigorously deregulate French capital markets appear to be bearing their first - 130 -

fruit, a tendency which is not yet as clearly manifest in the annual accounts of German businesses. At least such a proposition is confirmed by the finding that the amount of debenture loans recorded in the balance sheets of French corporations exceeds the respective German ratios by more than ten times. It may therefore be concluded that the French model of corporate finance has developed in the past from a heavily bank-intermediated system towards a more Anglo-Saxon like capital market-based model. Nevertheless, the contribution of capital markets to corporate finance is still of minor importance compared to alternative financing instruments. The results derived in this study demonstrate that the most important sources for French incorporated enterprises are to be found in equity, notably the accumulation of reserves, and inter-industry crediting, which both tend to provide some of the financial flexibility necessary in the asset conversion cycle. But, as in Germany, the borrowing channel based on lending relationships to suppliers is overcompensated by crediting to customers. Taking all that into consideration, it appears to be quite plausible that French corporations, owing to the fact that short-term bank loans tend to be less available, stock liquidities to a larger extent than do their German counterparts. In general, the results derived in this study tend to provide indications that the differences in the respective systems of corporate finance in France and Germany can be traced in large part to the institutional contexts in the two countries, which define particular rules and conditions under which enterprises decide their strategy for solving the capital structure puzzle and which differ in the two countries greatly and systematically, as described in the previous chapters. A very prominent factor is to be seen in the relationship between banks and companies. The German tHausbankt principle could be interpreted as a joint approach on the part of banks and their customer companies to solving the asymmetric information problem, inherent in credit contracts, by creating a closed financial information system. Long-term-relationships between banks and companies seem to be an efficient instrument for overcoming the information problems of banks and reducing transaction costs, which are incurred particularly in the collection, verification and evaluation of decision-relevant and reliable information on the economic situation and behaviour of borrowers by their lenders. The principal bank, having such access to internal information channels of companies, is able to accumulate precise information on credit risk during the years of continuous lending, performance monitoring, and consulting activities. Furthermore, its ability to collect comprehensive and reliable information on borrowers might be regarded as an adequate approach to resolving basic principal-agent conflicts, as described by Arrow, arising from the impossibility of contracting perfectly on the actions of an agent whose actions influence both his own welfare and that of others. Moral hazard and adverse selection problems tend to disappear once lenders no longer suffer from limited information on the rates of return on investment projects and the economic behaviour of their respective borrowers. The commitment-based banking model, as developed by Rivaud-Danset and - 131 -

Salais (1992), appears to be particularly appropriate for describing the specific relationships between the German SME sector and the banking system. Bi-directional commitment of both banks and companies tends to establish a partnership relationship, which appears to be one essential explanatory factor for the observed excessive bank borrowing possibilities of German SMEs. This leads to a typical situation which has been characterised by Hicks as an overdraft economy: financing activities are heavily concentrated on bank borrowing, and flexible access to short-term bank loans provides the necessary financial buffers, ensuring the companyss ability to react to unforeseeable events. By contrast, the situation of the large enterprise sector in Germany tends to display the characteristics of a typical auto-economy sector la Hicks. Banking intermediation is more or less non-existent and corporate funding relies primarily on internal funds, notably retained earnings in the form of reserves and accumulated provisions. These firms obviously run a financing strategy according to the pecking-order approach, self-financing is preferred to external borrowing - in order to avoid giving bad signals to investors - by issuing new stock, a model which could at least partly also explain the preference of German big businesses for retaining earnings via excessive risk provisioning rather than distributing earnings and trying to reabsorb the distributed amounts via capital increases. As far as French corporations are concerned, it may be assumed that corporate financing is increasingly displaying the features of the auto-economy model. Own funds are the major source of finance, and even in phases of significantly deteriorating earnings levels, French companies placed considerable importance on maintaining their degree of financial autonomy. Dependence on the lending opportunities of the banking system is considerably lower than in the case of German SMEs, and (owing to the fact that access to short-term bank loans is not as easy) considerable amounts of liquidity are stocked in order to ensure the necessary flexibility in the asset conversion cycle. The reduced use of bank finance tends to be the logical consequence of a procedure-based relationship between banks and their corporate customers. Under such conditions, access to bank loans is tied to clearly defined rules, notably the criterion of solvency. That might explain not only why overcoming the solvency constraint appears to be of particular importance for French businesses but also why even smaller French firms attempted to improve their capital structure in the period under review to a level which is comparable to that of big businesses. Furthermore, the observed divergencies in the respective systems of corporate taxation seem to have systematically influenced the financing decisions of the companies in the two countries. Whereas the German system systematically tends to promote profit distribution via the pay out - take back mechanism, the French system clearly provides incentives for a - 132 -

direct retention of profits at the company level. The French tax authorities have provided particularly favourable conditions for French companies to accumulate reserves by continuously lowering retention rates, thus creating a wide spread between the top rate of income tax and the respective profit retention tax rate. Conversely, it may be assumed that German firms, notably the larger ones, apparently opted for a strategy of tretaining earningst via extensive transfers to provisions. This strategy, which avoided the higher tax rate on the regular retention of profits and reduced the tax burden temporarily, appears to be particularly unattractive for French companies, as tax deductibility is not provided for in French law. Finally, the low level of own funds of German SMEs and their extensive bank intermediation would remain inexplicable without taking into account the favourable regulations on collateral recognition in German bankruptcy and composition proceedings.13 German bankruptcy legislation, unlike in France, guarantees comprehensive protection of creditorss interests and substantially limits the insolvency costs to be incurred by banks in providing finance to firms with a small capital base. In such a legal context, companiess provision with own funds assumes minor importance, as collateral provides a safer way of covering credit risks than do own funds.14

13 In addition, it should be noted that such a system only works under special conventions, e. g. a certain commitment by banks - the premises of a "Hausbank" relationship - because extensive collaterising could produce adverse effects, as the borrower is able to realize his guarantees immediately in order to reduce his own risk. 14 A very recent study (Grl et al., 1999) on the financing structures of west German enterprises comes to perceptively different results and conclusions. This is mainly due to the fact, that only a constant balanced sample is analyzed, the substantial differences in the financing structures of unincorporated and incorporated companies are not controlled for and the size-specific influences of institutional factors on corporate finance are not investigated.

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 %LEOLRJUDSK\
BDO (1994): Company tax in Europe, Brussels Belletante, B. T. (1991): Pour une approche des spcificits financires de la pme au travers du concept de territoire financier, Revue Internationale PME 4, pp. 29-79 von Bernstorff, C. (1993): Der Eigentumsvorbehalt in den EG-Staaten, Recht der Internationalen Wirtschaft, 5, pp. 365-372 Biais, B./Malcot, J.-F. (1996): Incentives and efficiency in the bankruptcy process: the case of France, World Bank PSD Occasional Paper No 23, Washington BMF (Bundesministerium der Finanzen) (1996): Die wichtigsten Steuern in Europa, Informationsdienst zur Finanzpolitik des Auslands, Bonn Boissonade, D./Palu, J. C. (1992): Les dlais de paiement en Europe, Banque de France, Bulletin trimestriel, 83, pp. 71-74 Boissonnade, D./Tournier, A. (1997): Lsendettement des entreprises de 1989 1995, Observatoire des entreprises, Banque de France, T96/08 Borio, C. (1996): Credit characteristics and monetary policy transmission mechanism in fourteen industrial countries: facts, conjectures and some econometric evidence, in: Alders, K./Koedijk, K./Wionder, H. (eds.): Monetary policy in a converging Europe, Dordrecht, pp. 77-116 Breig, H./Furlong-Wilson, P. (1996): Borrower information and the choice between bank debt and trade credit: The case of France and Germany, Zeitschrift fr Wirtschafts- und Sozialwissenschaften, 116, pp. 379-394. Carpenter, R. E. /Fazzari, S. M. /Petersen, B. C. (1994): Inventory investment, internalfinance fluctuations, and the business cycle , Brookings Papers on Economic Activity, 2, pp. 75-138 Chanel-Reynaud, G. (1995): Impact de la rforme financire sur lsappareil productif franais, rforme financire et transformation des entreprises (Collectif), Rhne-Alpes Programme, Recherche en Sciences Humaines, 30, pp. 1-25 134

Conseil National du Crdit (1993): Les garanties et le crdit aux entreprises, Paris Conseil National du Crdit (1995): Le risque de crdit, Paris Conseil National du Crdit (1998): Examen de propositions de rforme du rgime de la clause de rserve de proprit de l'Observatoire des Dlais de Paiement, Paris Creditreform (1996): Insolvenzen, Zahlungsverhalten in der Europischen Union 1994/95, Neuss Delbreil, M. et al. (1997): Equity of European industrial corporations, European Committee of Balance Sheet Offices - Net Equity Working Group, Paris Demartini, A./Kremp, E. (1998): Structure et niveau dsendettement des pme de 1988 1995, Revue dsconomie Financire, 46, pp. 123-141 Deutsche Bank Research (1995): Von der Pensionsrckstellung zum Pensionsfonds: Eine Chance fr den deutschen Finanzmarkt, Frankfurt/Main Deutsche Bundesbank (1984): Company pension schemes in the Federal Republic of Germany, Monthly Report, October, pp. 30-37 Deutsche Bundesbank (1992): Longer-term trends in the financing patterns of west German enterprises, Monthly Report, October, pp. 25-39 Deutsche Bundesbank (1994): Comparison of the annual accounts of small and mediumsized enterprises organized in different legal forms, Monthly Report, October, pp. 33-45 Deutsche Bundesbank (1996): West German enterprisess profitability and financing in 1995, Monthly Report, November, pp. 33-58 Deutsche Bundesbank (1997): West German enterprisess profitability and financing in 1996, Monthly Report, November, pp. 31-55 Deutsche Bundesbank (1998): The methodological basis of the Deutsche Bundesbankss corporate balance sheet statistics, Monthly Report, October, pp. 49-64 Dietsch, M. (1993): Des relations banques entreprises exemplaires, Banque, 538, pp. 42-44

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Dietsch, M./Kremp, E. (1998): Le crdit interentreprises. Les prteurs et les bnficiaires, Economie et Statistique, 314, pp. 25-37 Drukarczyk, J./Duttle, J./Rieger, R. (1985): Mobiliarsicherheiten. Arten, Verbreitung, Wirksamkeit, Kln Edwards, J./Fischer, K. (1994): Banks, finance and investment in Germany, Oxford Fischer, K. (1990): Hausbankbeziehungen als Instrument der Bindung zwischen Banken und Unternehmen: Eine theoretische und empirische Analyse, Bonn Grschel, U. (1993): Hausbankprinzip, Struktur des Bankensystems und Marktstabilitt, Die Sparkasse, 11, pp. 510-513 Grl, I./Stahlecker, P./Wohlers, E. (1999): Finanzierungsverhalten im Unternehmensbereich als gesamtwirtschaftlicher Risikofaktor, Wirtschaftsdienst, 79, pp. 252-258. Herbst, G. (1997): Einfhrung in das Konkurs- und Vergleichsrecht, 7th edition, Stuttgart Hicks, J. (1975): The crisis in Keynesian economics, Oxford Hom, F. (1991): Les relations banques entreprises en Rpublique fdrale dsAllemagne, La Revue Banque, 513, pp. 170-175 Huth, A. H.-J. (1996): Industriefinanzierung in Deutschland und Frankreich. Einflu nationaler Faktoren auf die Finanzierung durch Aktien, Anleihen, Hybride und Anleihen, Wiesbaden Jahn, U. (ed.) (1997): Insolvenzen in Europa, 2. Auflage, Bonn Klein, C. (1991): Schutzwirkung des Eigentumsvorbehalts im franzsischen Insolvenzverfahren, Recht der Internationalen Wirtschaft, 37, pp. 809-812 Kremp, E./Bardes, B. (1997): Dlais de paiement et solde du crdit interentreprises de 1988 1995, Bulletin de la Banque de France, 48, December, pp. 143-155 La Porta, R./Lopez-de-Silanes, F./Shleifer, A./Vishny, R. (1998): Law and finance, Journal of Political Economy, 106, pp. 1113-1155

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Litaudon, A. M. (1987): Der Eigentumsvorbehalt und die Zielsetzungen des Insolvenzrechts in Frankreich, Recht der Internationalen Wirtschaft, 33, pp. 348-353. Nardozzi, G. (1992): National specificities and current tendencies in financial systems, in: Zagmani, V. (ed.): Finance and the enterprise, London, pp. 247-263 Paranque, B./Rivaud-Danset D. (1998): Structures financires des entreprises industrielles francaises: Une approche en termes de conventions de financement, Bulletin de la Banque de France, 57, pp. 79-100 Quack, S./Hildebrandt, S. (1995): Hausbank or fournisseur? Bank services for small and medium sized enterprises in Germany and France, WZB Dicussion Paper FS I, Berlin Rivaud-Danset, D./Salais, R. (1992): Les conventions de financement. Premires approches thorique et empirique, Revue Franaise dsconomie, 7, pp. 81-120 Sass, G. (1993): Steuerharmonisierung in der EG - Perspektiven fr eine Harmonisierung der Krperschaftsteuer und der Gewinnermittlung, Der Betrieb, 46, pp. 113-126 Schmidt, R. H. (1997): Comparing the French and German financial systems, in: Kossbiel, H. (ed.): Internationale und Europische Finanzsysteme, Schriftenreihe des Fachbereichs Wirtschaftswissenschaften der Johann Wolfgang Goethe-Universitt, Frankfurt am Main, 5, pp. 9-33 Sherman, H./Kaen, F. R. (1997): Die deutschen Banken und ihr Einflu auf Unternehmensentscheidungen, Ifo-Schnelldienst, 50, pp. 1-25 SFAC (Socit Franaise dsAssurances Crdit) (1993): Le bulletin conomique de la SFAC, 970, pp. 1-25 Wood, P. R. (1995): Principles of international insolvency, London

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In this chapter, the question of enterprisess borrowing behaviour will be addressed in more detail. Above all, a debt function for about 2,900 French and 1,300 German incorporated firms is estimated for each country by microeconometric methods based on panel data sets. The main advantages of our study can be summarized as follows: it is a cross-country study based on identical definitions of the variables and very carefully harmonized data sets (see &KDSWHU ). We use relatively large panels and - what is even more important - small firms are included. Finally, dynamic panel econometric analyses are applied to total samples and to sub-samples, according to size categories, to be able to distinguish possibly different behaviour. This part of the study is structured as follows. 6HFWLRQ  serves as an introduction to the subject and has no country-specific character. A vast theoretical and empirical body of literature has examined the determinants of the capital structure. Several seminal papers have contributed to the theory of corporate finance and have already been evoked in &KDSWHU . The purpose here is not to survey these theories again but to present the main hypotheses that will be tested on French and German data. It should be underlined, following a point emphasized by Biais et al. (1995), that the theoretical literature is essentially Anglo-Saxon and that the empirical front has mainly concentrated on US firms. But in the last years this gap has been reduced, and a few articles are now focusing on European countries, too. 6HFWLRQ  presents the data sets, the regression variables and the descriptive statistics. The purpose of that sempiricals section is twofold: first, we want to document the corresponding relationships for both France and Germany; second, we will try to illustrate the crosscountry differences. 6HFWLRQV  and  contain our results of panel econometric estimations for both countries over the 1989-95 and 1991-95 periods respectively. We start with a static model and then proceed to assess the robustness of our econometric results by estimating a dynamic model with more sophisticated techniques relevant to these models, i.e. the generalized method of moments. We finally present results by size classes, allowing for different behaviour according to firm size. 6HFWLRQ  summarizes and raises a few questions for future research.

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The aim of this section is not to give a general overview of the standard models of corporate finance, as discussed in &KDSWHU , but to concentrate on a few potential determinants of the borrowing behaviour in the light of the relevant theoretical literature and the sign of their possible impact. Afterwards, the results of some recently published econometric studies are summarized.  ([SODQDWRU\ YDULDEOHV RI HQWHUSULVHVs GHEW

Given the assumption of perfect financial markets, the well-known irrelevance theorem of Modigliani and Miller (1958) should hold, i.e. the capital structure is arbitrary and no explanatory variables exist. However, if imperfections, such as bankruptcy costs, asymmetric information, etc., are admitted, the question for the sdriving factorss of firmss debt immediately arises. Since under such circumstances internal and external financing seem to be evaluated in a process of determination of the optimal capital structure, this issue is equivalent to the question of the explanatory factors of leverage. Leverage is basically defined as the ratio of total liabilities or total creditors to total assets and therefore determines what is more or less left over to creditors in the case of liquidation. According to the literature of corporate finance, debt can be assumed to be correlated with a long list of variables, namely:1 Firm size, growth opportunities, collateral, firm value, profitability, risk of return, bankruptcy probability, tax system, banking system, structure of ownership, R&D expenditures, legal form, age, reputation, danger of takeover, extent of regulation, etc.. It should be stressed that this list contains supply elements of credit (e.g. arguments that prove to be valuable to banks as potential lenders) as well as demand elements (arguments for enterprises as potential borrowers). In a technical sense, this is reflected in the fact that the measured value of debt represents the joint outcome of supply and demand forces. Therefore, the sign of correlation might vary, depending on which of the (sometimes contradicting) effects seems to be dominant.2 One of the characteristics of the international empirical literature on the determinants of firmss debt is that the authors do not test one theoretical model, with a clear derivation of the explanatory variables from the model, but present a succession of alternative
1 See Harris and Raviv (1991), Rajan and Zingales (1995), Biais et al. (1995). 2 The estimation of a structural model separating the supply versus demand side is beyond the scope of this study.

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hypotheses pertaining to different capital structure theories:3 cost-of-access theory, pecking order theory and asymmetric information, role of taxes, bankruptcy costs, agency costs and signalling costs. This leads to a long list of potential determinants, whose signs can vary from one theory to the other. The estimation of the debt equation allows for the validation or rejection of the different theories. They are summarized in 7DEOH  with reference to the main contributors. In the following paragraphs we review in detail those explanatory variables of leverage which are employed by selected econometric articles on borrowing behaviour (6HFWLRQ ) and by our own cross-country estimations of the debt function (6HFWLRQV  and ):4 )LUP VL]H: Two possible interpretations of the size effect can be distinguished. On the one hand, smaller firms might not be well endowed with own funds and necessarily rely on bank credit. This is because larger firms have access to capital markets owing to reduced asymmetric information, whereas smaller firms might not, thus applying a negative correlation. On the other hand, banks might have more incentive to restrict smaller customers in first as a result of this asymmetry, when they decide to cut down loans. In this case, a positive relationship is to be expected. *URZWK RI HQWHUSULVHV: Faster growth may, on the demand side, intensify the need for more external finance, which implies a positive correlation. This might, on the supply side, be strengthened by the fact that faster-growing firms are less subject to financing constraints from the banking system as high future profits are expected. On the other hand, dynamic internal growth may increase agency costs because such firms are difficult to control. Therefore, leverage should decrease. &ROODWHUDO: If there is an asymmetric distribution of information between firms and banks, the agency costs of the creditor (bank) can be reduced by the firm sending signals. Collateral may serve as such a signal, which diminishes the danger of moral hazard. The bank receives sadditional informations about the firm and, when offering collateral, will reduce the expected loss in case of insolvency. Therefore, the supply of bank credit and the value of the collateral should be positively correlated.
3 Therefore it is not possible to present one coherent theoretical (and mathematical) model from which the hypotheses are deduced from. An impression of the procedure of empirical research on this subject is given in 6HFWLRQ . 4 Due to the non-availability of information for one or both countries, we are not able to directly include the variables banking system, R&D expenditures and structure of ownership in our debt equation. However, as shown later, it has to be borne in mind that some of these determinants do not vary a lot over time and will be taken into account indirectly by introducing fixed effects also known as unobservable firm characteristics (banking, ownership, and additionally legal form where the relevant information exists in principle). Taxes may be partially macro variables which can explain the significance of year dummies in the model estimated in 6HFWLRQV  and .

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 )LUP YDOXH DQG SURILWDELOLW\: Once again, two possible interpretations of the correlation between leverage and the variables can be considered. On the one hand, a high value of the firm provides a potential lender with a high degree of collateral and therefore with a higher probability of the repayment of debt. It thus seems plausible to expect a positive correlation. The same argument (on the supply side) might apply to current profitability. Furthermore, firms tend to increase asset formation if the marginal product of capital is high. Consequently, demand for external funds may rise. However, given a certain level of planned expenditure, demand for loans decreases with an increasing amount of profit. Another approach is based on asymmetric information and the pecking order theory. Firms finance their needs in a hierarchical fashion. Firms will prefer to raise funds through retained earnings rather than through debt and equity (issuing new shares). Following these considerations, a negative relationship between profit and the level of borrowing could be expected. It has also been argued that the pecking order hypothesis could be more relevant to small firms, since their relative cost of debt and/or external equity may be higher. 5LVN RI UHWXUQ: Given agency and bankruptcy costs that have to be taken into account by banks as creditors, a higher volatility of earnings (usually employed as a measure of risk) might lead to a higher probability of default. Therefore, a negative correlation between leverage and risk can be concluded and in general, an unfavourable financial status may have a negative impact on the debt ratio. Contrary to this traditional approach, arguments can be found suggesting that the impact of risk on debt may be positive. More risky firms seem to be less subject to the problem of under-investment, so that agency costs may be reduced, possibly outweighing the increase in the bankruptcy probability. In addition, it can be argued that this correlation is very sensitive to firm size. Creditors may have the tendency or the obligation to continue lending to risky firms in hopes of avoiding bankruptcy, and this can be particularly the case for large firms. Furthermore, a positive relationship between risk and leverage may result from the firmss necessity of "distress" borrowing during an economic recession where the risk position is usually worsening. 7D[HV: The overall relationship of debt and taxes is rather complex and difficult to predict. In spite of Millerss neutrality approach, the tax system might exert a significant influence on the leverage of enterprises, depending inter alia on the level of the tax rate, the depreciation allowances, the way of accounting losses, etc.. According to theory, several channels might be at work. First, an increase in the corporate tax rate makes external financing more advantageous if interest expenses are tax deductible. On the other hand, a higher tax rate reduces the firmss funds and consequently increases the user cost of capital. Fixed capital formation is expected to slow down and so does the - 143 -

demand for external funds. From a theoretical point of view, the total effect is unclear. Furthermore, the non-debt tax shields (e.g. depreciation allowances, investment tax credit, loss carry-forwards, etc.) have to be considered. %DQNLQJ V\VWHP: The influence of the banking system seems to be a rather important determinant of enterprisess debt. There are two well-known prototypes of bank-company relationship: on the one hand, the universal banking or "bank-based" system, on the other hand, the investment bank system of the Anglo-Saxon type ("market-based"). In the literature two reasons are mentioned why firmss debt behaviour in bank-based systems is different from market-based. First, a bank-based system allows a bank to participate in the own funds of an enterprise (by holding shares). As an owner of the enterprise, its asymmetric information is reduced and the bankss willingness to supply credit to the firm increases. Additionally, shareholding may serve as a signal for other lenders to engage in borrowing. Second, in a bank-based system a special bank-firm relationship may exist even if the bank does not hold shares. This is the case in the German "Hausbank" context where a bank has a very close relationship with an enterprise leading to special lending behaviour over the business cycle and in financial distress situations. 5 ' H[SHQGLWXUHV DQG ILUP LQQRYDWLRQV: The problem of asymmetric information is very obvious as the economic outcome of research activities is hard to observe and control. Hence expenditure on R&D can be considered as a measure of agency costs. Additionally, in the case of insolvency the value of such intangibles is often zero or at least very difficult to estimate. Therefore, a negative relationship between debt and R&D seems to be intuitive. 6WUXFWXUH RI RZQHUVKLS: A positive relationship between debt and the concentration of owners is expected. Two reasons are often mentioned. First, the owners or shareholders of an enterprise - unlike the management - are interested in increasing debt to support the profitability of own funds (leverage effect). Second, ownership in "one" hand makes the creditors feel that the often-cited agency conflict between managers and owners is reduced, and therefore they agree to supply credit. /HJDO IRUP: For several reasons (e.g. less restrictive accounting principles, no control by capital markets), private limited firms are much harder hit by asymmetric information than their public limited counterparts. Consequently, private limited firms must offer higher collateral to receive credit or, on the other hand, they have less debt. A similar argumentation applies to the listed versus non-listed enterprises sometimes discussed in the literature. - 144 -

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$SSURDFK 0DLQ FRQWULEXWRUV Modigliani/ Miller (1958) Miller (1977) )LUP VL]H *URZWK 7D[HV &ROODWHUDO /RDQV IURP 7UDGH FUHGLW 9RODWLOLW\ RI DVVRFLDWHG SURILW FRPSDQLHV 3URILWDELOLW\

Modigliani-Miller

c a p i t a l s t r u c t u r e i s a r b i t r a r y: n o d e t e r m i n a n t s no correlation proxy for default probability: positive proxy for access costs: negative proxy to increase agency costs: negative proxy for profit expectations: positive positive proxy to proxy to reduce reduce agency costs: agency costs: positive positive proxy to positive signal: positive proxy for sound economic performance: positive proxy to positive signal: positive proxy for proxy for good news: positive private information: negative proxy for proxy for availability of internal funds: negative funds: positive proxy for secured debt: positive proxy for probability of bankruptcy: negative

Taxes

Bankruptcy costs

Stiglitz (1969)

Cost-of-access theory

1)

Agency costs

Jensen/ Meckling (1976) Ross (1977), Leland/Pyle (1977)

Asymmetric information and signalling costs

Asymmetric information and pecking order theory

Myers/Majluf (1984), Myers (1977)

1) No main contributor reported. The approach can be derived from the pecking order theory (see Myers, 1984).

 (FRQRPHWULF VWXGLHV RYHUYLHZ This section mainly presents an overview of some recent econometric studies relating to French and German firms.5 They are also summarized in 7DEOH . To be comparable with our study, as far as possible estimations based on the definition of debt chosen in this chapter (namely total creditors divided by total assets) are reported. It has, however, to be borne in mind that any comparisons suffer from the fact that the studies are based on different time periods, different definitions of leverage, different methodologies and different firm samples. To anticipate the main conclusions of this section, the hypothesis of Modigliani-Miller is clearly rejected, but a unique and stable relationship between debt and all the explanatory variables cannot be found (even for France and Germany). On the other hand, corporate finance theory described above is not able to provide an unambiguous picture either. Bourdieu and Colin-Sdillot (1993) analyse the determinants of the capital structure looking at two different debt ratios, namely total debt reported to total assets and long-term debt reported to long-term debt plus own funds, with a balanced sample of 1,309 French firms over the 1986-1990 period. Using a covariance analysis with sector, year and size dummies, they find that industry dummies play an important role and suggest that they reflect tax differences or different creditor information on expected growth. Large firms with more than 500 employees have significantly less debt than smaller and/or younger ones, a finding which confirms the existence of access costs to financial markets. For both debt ratios, a positive correlation with the investment ratio and a negative correlation with cash flow are estimated. This is interpreted as a hint of increasing autonomy of the enterprise vis--vis external funding, as suggested by pecking order theory. The presence of banks as owners should improve the quality of information and reduce conflicts: a fact which is consistent with their finding of a positive sign of bank shareholding in the explanation of the long-term debt ratio. Firms with higher collateral do also increase their level of long-term debt. On the other hand, profitability, measured as operating income to tangible assets, proves to be positively correlated with total debt, but the correlation with the long-term debt ratio is not significant. Rajan and Zingales (1995) present a multi-country comparison (US, Japan, Germany, France, Italy, UK and Canada). After specifying the necessary accounting adjustments and a descriptive part, which includes an analysis of the relevant institutional characteristics of the countries considered (taxes, bankruptcy law, banking system and ownership
5 Here the emphasis of the summary lies on studies for European countries published in the nineties. Virolainen (1998) quotes several new studies for Nordic countries.

146

concentration), they perform a cross-section regression with respect to listed firms. Because of data limitations, they restrict themselves to the following right-hand-side variables: fixed tangible assets, the market-to-book ratio, firm size and profitability. The results show that firm leverage (adjusted debt to book value of adjusted total assets) surprisingly turns out to be fairly similar across the G-7 countries.6 However, according to the authors, the observed correlations cannot always be clearly explained by the theoretical foundations or "by institutional differences previously thought important." (Rajan and Zingales, 1995, p. 1458). Biais et al. (1995) study the behaviour of about 2,700 French firms using average values over the years 1987-1989. They underline that no theoretical model exists that integrates all the different theories of capital structure, and that including all the variables associated with these different theories in a single equation may have little theoretical justification. Therefore, they test different hypotheses on capital structure with a system of simultaneous equations, which jointly model bank debt, trade credit and insiderss loans to the firm (credit between affiliated enterprises). Their best results are obtained for a system of two equations (bank debt and trade credit) keeping in mind econometric problems (e.g. misspecification, use of proxies, collinearity). The authors present strong evidence in favour of a so-called inverse U-shaped relation between bank credit and firm size. The empirical evidence also suggests that bankruptcy costs (positive sign of tangible assets, negative sign of the ratio of wages and social debt to operating income), non-debt tax shields (negative sign) and access costs to sources of financing are important determinants of capital structure. Mixed evidence can be reported on the signalling approach and the pecking order theory (i.e. a negative sign of profit and a positive sign for trade credit in an equation explaining the bank debt ratio). Schwiete and Weigand (1997) analyse the debt behaviour of 230 German public limited enterprises. As potential determinants of enterprises' leverage, they identify profitability, intangible investment as measured by R&D expenditures, risk of return, growth and size of enterprises, owners' concentration and bank shareholding. After taking account of possible endogeneity of profit (due to the leverage effect), the fixed effects estimations give - according to their view - the expected signs: profit and owners' concentration with a positive correlation, growth, risk and size with a negative correlation. Nevertheless, as the authors explain, some doubts about the positive relationship of leverage and R&D expenditures remain. The impact of bank shareholding seems to be ambiguous. At least the

6 For all countries considered and as far as the determinants of debt are significant, tangibles (positive), market-to-book value and profit (both negative) have the same signs. The variable size turns out to be positive, with the exception of Germany.

147

results do not unequivocally support the theoretical hypothesis that bank shareholding reduces agency problems. Asgharian (1997) concentrates on investigating the financing decisions of 156 nonfinancial firms listed on the Stockholm Stock Exchange during the economic recession in Sweden from 1989 to 1992. The empirical model relates the percentage change in leverage (defined as the debt to equity ratio) to firm profitability, the ratio of investment to total assets (proxy for growth), the percentage change in stock prices, the dividends to total assets ratio and the lagged leverage ratio.7 The dynamic model allows for firm and time effects as well as time-varying coefficients. According to these results, leverage depends negatively on dividend payments and ex-ante leverage (proxied by leverage t-1). Additionally, profit seems to have in general an adverse effect on firmss debt, but the latter effect holds only for high-profit periods. For low-profit periods, a positive relationship is reported. Finally, there is still a considerable decrease in leverage from 1990 to 1992, unexplained by the econometric analysis. According to the author, this can be partly attributed to the movement of the interest rates and to the tax reforms in 1991 and 1992. From an econometric point of view, it must be criticized that the author introduces the lagged dependant variable without taking account of the fact that the model contains fixed firm effects. Therefore, the results may be biased.8 The study by Virolainen (1998) deals mainly with the effects of taxation on firmss financial decision-making.9 For this purpose, he makes use of data from 548 Finnish manufacturing companies over a period from 1978 to 1991. The descriptive analysis suggests evidence for significant variation in the degree of tax exhaustion across companies. The dynamic panel econometric analysis permits the identification of income and substitution effects of nondebt tax shields on firmss debt usage. Consequently, such shields have an adverse effect on borrowing only for less profitable firms, whereas the correlation is positive for their counterparts. Contrary to the neutrality approach of Miller (1977), this stresses the role of taxation in the firms' financial decision-making and implies that changes in the tax system might give rise to significant changes in firmss financing behaviour. The paper by Ramb (1998) contains an international comparison by means of a crosssection analysis, based on the year 1993. He basically seeks to explain the structure of

7 The variables stock prices and dividends are expected to be negatively correlated to leverage. First, a firm in a favourable stock market condition prefers to issue shares; second, a high-dividend firm which signals positive future income can use equity instead of loans to finance assets. 8 See 6HFWLRQ  9 The study concentrates on estimating the impact of non-debt tax shields. However, the marginal tax rate is not taken into consideration. For US enterprises a positive correlation between the marginal tax rate and enterprise debt is reported by Graham (1996).

148

liabilities and its determinants for Belgium, Germany, France, Great Britain, Italy, the Netherlands and Spain in terms of legal forms (private limited versus public limited companies). While additionally splitting up total creditors into bank liabilities and trade/other liabilities, the determinants reviewed are collateral, growth, size and profitability. Among the results that have to be mentioned is the fact that the determinants due to legal forms do not show marked differences between Germany, France, Spain and the Netherlands. Expressed in another way, this would be equivalent to the hypothesis that the legal form does not matter. In Great Britain, Italy and Belgium, differences do occur, showing up mainly in the size of the coefficients. One explanation could be that the theoretically plausible problems posed by informational asymmetries do not prove to be of major importance. Moreover, some results suggest that banks usually require higher collateral from other legal forms than from public limited companies. In addition, the links between the variable collateral and bank liabilities on the one hand and between total liabilities and profitability (respectively growth) on the other hand appear to be rather stable. On the contrary, the correlation between firm size and debt varies over countries. Michaelas et al. (1998) investigate the borrowing behaviour of 3,500 small UK firms (with less than 200 employees) over the 1986-95 period. Instead of a fixed effects model, the regressions are run for each year by applying the SUR approach.10 One of the study's aims is to show that the coefficients of the right-hand-side indicators vary over time "in terms of magnitude, direction and significance". The enterprises' debt (defined as total debt, shortterm or long-term debt related to total assets) is explained by no fewer than 10 determinants. Here we confine ourselves to reporting a few selected variables. The growth variables11 and the collateral proxies (tangible fixed assets and stocks) are positively correlated with the liabilities of the private limited firms. The impact of size on total debt is very small and positive, contrary to the theoretical hypothesis of access costs. However, age - although usually supposed to be correlated with size - has the expected negative sign. Finally, a higher risk results in a higher level of leverage, which is not in line with the traditional approach.

10 Each equation is estimated "separately". But the SUR approach (Seemingly Unrelated Regression) ensures that the correlations of the disturbances are taken into account. Therefore the estimator is more efficient than OLS. 11 The growth rate of total assets is interpreted as a proxy for past growth, future expansion is described by the growth rate of intangible assets.

149

7DEOH  %RUURZLQJ EHKDYLRXU  (PSLULFDO UHVXOWV IRU )UHQFK DQG *HUPDQ ILUPV
$XWKRU &RXQWU\ 3HULRG 6DPSOH 7\SH RI 'HSHQGHQW 1XPEHU RI ILUPV YDULDEOH ILUPV different 1986- balanced from all 1990 panel, sectors, over definitions of debt 1,309 20 employees total creditors/total assets long-term debt /l.-t. debt + own funds different 19873-year firms over definitions of 1989 average, FRF 100 debt 2,718 millions of sales bank credit/ total assets 19671984 balanced panel, 230 public limited companies total creditors /total assets )LUP VL]H *URZWK &ROODWHUDO 3URILW 5LVN 2WKHUV (FRQRPHWULF WRROV Covariance analysis

Bourdieu/ ColinSdillot (1993)

France

size dummies

net investtangible ment/value assets/total added assets + na

operating income/ tangible assets +

na

cash flow/ value added -

(ns) na

Biais/ Hillion/ Malcot (1995)

France

size dummies

na

tangible operating assets/total income/ assets total assets

yes

Simultaneous equations, 2SLS

Schwiete/ Weigand (1997)

Germany

inverse Ushaped function log of employees + -

+ growth of sales + na

operating volatility result/own of profit funds + + + yes Fixed effects model Regressors exogenous Profit endogenous

7DEOH  FRQWLQXHG
$XWKRU &RXQWU\ 3HULRG 6DPSOH 1XPEHU RI ILUPV 4-year average 7\SH RI ILUPV 'HSHQGHQW YDULDEOH adjusted debt/ (adj. debt + book value of adj. equity) )LUP VL]H *URZWK &ROODWHUDO 3URILW 5LVN 2WKHUV (FRQRPHWULF WRROV

Rajan/ Zingales (1995)

G-7 Countries

19871990

listed firms, consolidated accounts

log of sales

market-to- tangible book value assets/total assets growth of sales + + (ns) + + + + tangible assets/total assets (ns) -

operating result/total assets + (ns) (ns) operating result/total assets -

na

na

Censored Tobit model

Germany France Ramb (1998) 7 EU Countries Germany 1993

175 117 crosssection 810 1,059 private and public limited corporations public private public private different definitions of debt total creditors /total assets

+ (ns) log of sales (ns) (ns) (ns)

na

na

Covariance analysis

France

13,217 1,773

 'HVFULSWLRQ RI WKH GDWDEDVH DQG VRPH GHVFULSWLYH VWDWLVWLFV

In this section, the empirical foundations of our study are presented. First, we emphasize the advantages of the data in comparison with the relevant literature summarized in 6HFWLRQ . The most important characteristics are that the debt functions to be estimated are based on large, harmonized databases which include small and medium-sized firms and on common definitions of the variables. After the description of the variables, some descriptive statistics of the trimmed and balanced panels are presented.  'DWD DQG GHILQLWLRQ RI WKH YDULDEOHV The cross-country dimension of our analysis necessitates harmonization in several respects. First, both databases have been carefully harmonized as described in detail in &KDSWHU . We restrict our analysis to incorporated enterprises (private and public limited companies) from the manufacturing sector. Then, we have defined an extensive set of variables, as found in the relevant literature, investigating the borrowing behaviour of firms. Therefore, a further characteristic of our study worthwhile to be emphasized is the fact that the estimations for the French and German samples are based on identical variables. The relevant period is 1987 to 1995, including a whole business cycle and the up and down of interest rates. The estimations for both countries are based on balanced panels. About 2,900 French and 1,300 west German firms are available. In comparison with most of the empirical investigations aforementioned, the database of our study is quite large. Above all, we do not concentrate only on large or listed firms, and both panels contain small and mediumsized firms. This allows to test the hypothesis of different borrowing behaviour according to firm size, by breaking down the two samples. This study focuses on the overall borrowing behaviour of enterprises. Therefore we defined the debt ratio as generally as possible. The numerator of the debt ratio (Crtot) is defined as short-term plus long-term creditors without provisions (including commercial creditors, i.e. trade credit). The denominator is the balance sheet total minus unpaid capital or total assets. Some empirical studies contain more restrictive definitions of debt, for example bank credit. Such a procedure is in principle possible. But it immediately raises the question of whether bank credit and other debt components may be substitutes.12 These issues, which seem to be of special interest to monetary policy, are beyond the scope of this chapter.
12 The article of Biais et al. (1995) is an example dealing with this aspect.

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The right-hand-side variables used to provide some explanation of borrowing behaviour can be divided into a few rough categories: size, growth, collateral, profit, risk and cost of finance. In order to "check" for each category, several variables are built and a few positions proved to be the most useful ones. We present here only the set of variables that are used in the econometric framework:13 Without any doubt, firm size is a possible determinant of debt behaviour. A first analysis of variance in a static context confirms it. Nevertheless, in the case of fixed effects and dynamic models, size cannot be used as a right-hand-side variable as size does not sufficiently vary over time. However, firmss dimension is taken into account by estimating the borrowing behaviour by size class. The growth dynamics of the firms has been included through the growth of balance sheet total (Grbal) and the growth of turnover (Gturn). The investment ratio, defined as variation of tangible fixed assets to turnover (Tangr), has also been tested in some regressions. Collateral of a firm may be a signal to reduce the asymmetric distribution of information between debtors and creditors. Our proxy interpreted as collateral is the sum of tangible fixed assets plus stocks divided by balance sheet total (Colts). Another proxy tested does not include stocks in the numerator (Colta). Several definitions of profit are possible in theory. Taking into account the availability of information in both countries, net profit to total assets (Roi), interpreted as return on investment, has been used. As emphasized by the literature, supply of credit depends on additional knowledge about enterprises, which have the task of reducing the sinformation-gaps. Risk of profitability (Risk1) of a single firm might be seen as a variable that possibly includes valuable information.14 Here the risk variable is measured by the squared relative difference between the firm-specific profit (net profit/turnover) and the average profit of all available firms.
13 For example, imperfect markets result not only from an asymmetrical distribution of information, but also from distorting corporate taxes. In the framework of this project, two variables, representing the average corporate tax rate respectively the depreciation rate (as proxy for non-debt tax shields) were tested (not reported here). According to the method described by Graham (1996) calculating marginal tax rates based on firm data, further work should be done on the definitions of these variables. 14 In general, banks and other creditors are interested in the financial status or the bankruptcy probability of the firm. The proxy often employed for this purpose is the so-called interest coverage ratio. We calculated this variable, too. As the distribution was out of range, we did not include it in the empirical analysis presented in &KDSWHU . Carpenter et al. (1998, pp. 516-517) draw the conclusion that the coverage ratio "may be more sensitive to measurement error in micro data than in aggregate data (...)"

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 Another variable, which seems to be an important determinant of enterprisess debt and is surprisingly not mentioned in the empirical literature, is the cost of finance. This position is defined as interest expenditure divided by financial creditors (excluding commercial creditors from debt) and can be interpreted as a firm-specific interest rate (Rate1).15 The underlying idea of the variable is that an increase makes external funds more expensive. Consequently, a firm prefers to finance assets by own funds. A similar argumentation can be implemented with respect to the more sophisticated concept of user cost of capital. Both ideas imply a negative relationship.  8QEDODQFHG YHUVXV EDODQFHG SDQHO From an econometric point of view, two problems have to be faced, namely the decision of working or not with a balanced data set and the decision of excluding some observations which appear to be substantial outliers. The two choices are not totally disconnected, because imposing on a firm to be present in the sample over the whole period studied is clearly a restriction and a way of excluding some outliers. In addition, for both countries, the restriction to the balanced dataset does not only have to deal with the survival process, but also with the participation decision. The fact that an enterprise does not belong one year to the data set or is excluded may be the result of a participation decision by the firm (in the French case) or by the bank (in the German case) (see in detail &KDSWHU ). The coverage of the French data set has improved over the years, as shown in 7DEOH , from 11,000 observations in 1987 to almost 16,000 in 1995. This participation rate augmentation is dominated by an increase in the number of small firms over the respective period. Imposing to use a balanced data set prevents to take into account this improvement of the sampling process. On the contrary, in the German panel, the participation of firms decreased over the time period considered. 7DEOH  )URP UDZ GDWD WR WULPPHG DQG EDODQFHG GDWD VHWV QXPEHU RI REVHUYDWLRQV
)UDQFH 1987 Raw Balanced Trimmed and balanced in % (of raw data) 26.5 10,923 1990 13,924 4,908 2,899 20.8 18.2 11.6 1995 15,941 1987 10,984 *HUPDQ\ 1990 10,984 2,905 1,275 11.6 14.2 1995 8,962

15 The problems of this variable are discussed by Stss (1996).

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Until the mid-eighties, most - not to say all - of the econometric studies using panel data were conducted on balanced data sets. The main reason was the difficulty of working with large and unbalanced data sets. A number of seminal empirical studies showing the impact of the survival bias,16 the rapid development of panel data analysis in the eighties and nineties as well as the huge improvement in computer capabilities led to the development of empirical studies based on unbalanced data sets.17 At the same time, panel data analysis has produced new techniques: increase in the use of instrumental variables techniques (IV), development of generalized method of moments (GMM), dynamic models. The estimation of these models requires lagged variables.18 This implies sufficiently long panels: estimating a dynamic model over a five-year period requires at least eight years of data. Therefore, the choice of restricting ourselves in this first study to a balanced data set is less a restriction than a necessity if we want to test our model over several years. Nevertheless, we compared some selected figures of the trimmed unbalanced and trimmed balanced panel for each country (not reported here) to cross-check for possible implications of this restriction.19 For both countries, the important result is that the movements of all variables over the period seem to be independent of the panel structure (unbalanced and balanced). Both groups reduce average employment (measured by mean) from the end of the eighties to 1995.

16 "The sample selectivity problem may be quite serious for panel data. If observations (and data) are not missing at random, estimates that are based on strimmeds and sbalanceds sub-samples could be badly biased." (Griliches, 1998, p. 276) 17 An excellent example of the dramatic changes in the "history" of panel data are the successive editions of the reference book of Mtys and Sevestre (1992, 1996). 18 The choice of a dynamic model may be connected with the fact that there is an endogeneity problem and that some explanatory variables are not exogenous. The within and the first difference estimators are consequently biased (see 6HFWLRQ ). The use of IV or GMM is one way of resolving this problem, which may also deal with heterogeneity and measurement error issues (Sevestre and Trognon, 1996a; Mairesse and Hall, 1996). In the case of a correlation between the right-hand-side variable and the error term, the instrumental variables should be lagged at least twice. In a first difference model, the instrument \W and the error term XW=t- t-1 are then correlated, requiring the use of \W (in detail, see 6HFWLRQ ). 19 Even in an unbalanced context, it is important to exclude the firm and not only the observation, when excluding outliers, to avoid introducing a bias (Demartini and Kremp, 1997).

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 7ULPPLQJ DQG EDODQFHG VDPSOHV

Firms with zero employment or negative own funds have been excluded. Then, using a method presented and compared with alternative methods in Kremp (1995), firms with observations outside the interval defined by the first and third quartiles, minus or plus five times the inter quartile range, were discarded for the following ratios:20 net investment in tangibles to net turnover,21 cash flow to net turnover, net profit to total assets, interest paid to financial creditors and the risk variable. For the growth rate variables (total balance sheet, turnover, tangible assets) and the investment ratio, the same selection rules were used for both countries after a check of the distribution.22 7DEOH  presents the (unweighted) mean values for 1995 of most variables used in our econometric analysis without distinction by size class. The largest difference concerns size. German firms are almost four times larger than French firms: 829 compared with 222. And additionally, the "extreme" enterprise at the end of the distribution is also four times larger than the biggest French firm within the trimmed balanced panel. But the main results are the similarities which appear between the two countries. To be a little more precise, firmss growth rates, measured with respect either to balance sheet total or to turnover, are not very different from one country to the other. The collateral ratio is significantly larger in Germany, which may reflect in part a different industry mix of the samples, as described in &KDSWHUV  and . 7DEOH  shows detailed information for the year 1995. But additional knowledge with respect to the movement over the whole period considered is necessary in order to summarize some stylized facts and to check whether our balanced panels are in principle consistent with the observations of &KDSWHU  and the overall economic development. These data are presented in 7DEOH  and additionally, the evolution of selected variables is reported in )LJXUHV  and . The striking result is the difference in the debt ratio behaviour in the two countries in contrast with other ratios which appear to show many more similarities in their evolution:

20 The cleaning of the dataset has been carried out in two steps: first the impact of discarding firms with observation(s) outside the interval defined by the first and third quartiles, minus or plus five times the inter quartile range for most variables, has been looked at. Results have suggested that, in some cases, it was sufficient to clean on the concept and, in other cases, the exclusion of outliers would reject too many observations. Therefore, some ratios have not been included in the econometric work. 21 As shown in 7DEOH , two definitions of the investment ratio are possible in France: variation of tangible fixed assets to turnover, as in Germany (Tangr), or net investment in tangibles to turnover (Tangi). Therefore, in order to be able to compare our results with other French studies a special trimming of Tangi was done for French data. 22 Grbal [-75 %, 300 %], Gturn [-70 %, 200 %], Gtang [-80 %, 400 %] and Tangr [-50 %, 150 %].

- 156 -

7DEOH  'HVFULSWLYH VWDWLVWLFV LQ   %DODQFHG DQG WULPPHG GDWD VHWV

)UDQFH 2,899 firms *HUPDQ\ 1,275 firms Min, Max, Min, Max, Unweighted Unweighted in % in % in % in % mean and mean and (standard error of (standard error the mean), of the mean), in % in % 59.14 8.7 98.6 56.81 4.9 98.4 (0.31) (0.59) 5.74 -44.2 113.0 6.34 -59.8 187.5 (0.27) (0.50) 6.89 -58.6 160.9 7.35 -50.3 126.0 (0.29) (0.43) 3.24 0 21.1 na (0.06) 0.26 -16.2 17.3 0.19 -11.7 70.0 (0.05) (0.11) 17.47 0.2 70.2 24.68 0.1 85.2 (0.20) (0.46) 42.11 0.3 93.0 55.66 3.4 98.9 (0.29) (0.47) 3.29 -19.5 23.2 2.66 -16.2 26.4 (0.08) (0.14) 6.68 0 32.8 6.50 0 30.6 (0.08) (0.09) 1.65 0 20.5 2.22 0 19.8 (0.06) (0.10) 222 1 41,635 829 3 167,200 (20.2) (176.1)

Total debt /total assets Growth rate of total assets Growth rate of turnover Investments in tangibles/turnover Variation of fixed assets/ turnover Tangibles/total assets Tangibles plus stocks/total assets Net profit/total assets Interest paid/financial creditors Measure of risk with net profit/turnover Number of employees

Crtot Grbal Gturn Tangi Tangr Colta Colts Roi Rate1 Risk1

The average French debt ratio has decreased by almost 10 percentage points over the period considered, whereas in Germany this ratio seems to be relatively stable. (cf. )LJXUH $). This confirms the macro evolutions described in &KDSWHU . On the other hand, the growth rate of total assets, the turnover growth rate, the profit variable and the risk variable are following the same business cycles in both countries and are more volatile over time than the debt ratios (cf. )LJXUH ). Two other variabless evolution needs to be emphasized: The computed interest rate, which represents the cost of finance and is calculated only on balance sheet data is more similar to the up and down of the published market rates in Germany than in France (cf. )LJXUHV  DQG ). The size of the enterprises, represented by the variable "employees", shows a much sharper decrease in Germany than in France.

- 157 -

7DEOH  &RPSDULVRQ RI WKH PDLQ YDULDEOHVs VWDWLVWLFV RYHU WKH  SHULRG
Unweighted mean and (standard error of the mean), in % 1988 1989 1990 1991 )UDQFH - 2,899 firms Debt-to-total assets 68.7 67.5 65.8 63.6 (Crtot) (0.27) (0.27) (0.28) (0.29) Growth rate of total assets 13.64 12.46 9.07 4.44 (Grbal) (0.34) (0.32) (0.32) (0.29) Growth rate of turnover 11.30 12.40 7.49 2.81 (Gturn) (0.29) (0.29) (0.26) (0.28) Collateral 43.78 43.66 43.85 43.40 (Colts) (0.28) (0.28) (0.28) (0.29) Profit 4.40 4.52 4.59 4.08 (Roi) (0.07) (0.07) (0.08) (0.08) Cost of finance 8.36 8.35 8.75 8.57 (Rate1) (0.09) (0.09) (0.10) (0.10) Measure of risk 0.63 0.61 0.70 1.08 (Risk1) (0.02) (0.02) (0.02) (0.03) Number of employees 232 234 236 236 (23.5) (23.1) (23.2) (22.9) *HUPDQ\ - 1,275 firms Debt-to-total assets 58.7 58.6 58.9 57.7 (Crtot) (0.59) (0.59) (0.58) (0.59) Growth rate of total assets 13.18 13.48 12.57 8.42 (Grbal) (0.64) (0.58) (0.58) (0.56) Growth rate of turnover 11.60 12.39 12.11 9.19 (Gturn) (0.50) (0.41) (0.49) (0.47) Collateral 58.43 57.91 57.73 58.08 (Colts) (0.45) (0.45) (0.45) (0.45) Profit 4.14 4.08 4.39 3.99 (Roi) (0.14) (0.14) (0.15) (0.15) Cost of finance 5.73 6.57 7.37 7.94 (Rate1) (0.08) (0.10) (0.11) (0.12) Measure of risk 0.94 0.99 0.87 1.20 (Risk1) (0.05) (0.06) (0.05) (0.06) Number of employees 923 940 968 962 (211.7) (211.6) (214.9) (202.4) 1992 61.7 (0.30) 3.24 (0.29) 1.44 (0.27) 43.19 (0.29) 3.47 (0.08) 8.52 (0.10) 1.83 (0.06) 232 (22.1) 56.8 (0.59) 3.73 (0.47) 2.54 (0.44) 57.90 (0.47) 3.33 (0.14) 8.51 (0.12) 1.87 (0.09) 945 (201.4) 1993 59.7 (0.30) -0.65 (0.26) -2.87 (0.26) 42.56 (0.29) 2.69 (0.10) 8.17 (0.10) 4.39 (0.15) 225 (21.6) 56.3 (0.60) 1.51 (0.45) -4.14 (0.39) 56.57 (0.47) 2.59 (0.13) 8.06 (0.12) 3.21 (0.13) 904 (198.6) 1994 59.4 (0.31) 6.50 (0.27) 5.06 (0.26) 41.60 (0.29) 3.51 (0.09) 6.94 (0.09) 1.71 (0.06) 221 (20.5) 57.0 (0.58) 7.07 (0.49) 5.72 (0.47) 55.33 (0.48) 3.28 (0.15) 6.81 (0.10) 1.89 (0.09) 851 (186.6) 1995 59.1 (0.31) 5.74 (0.28) 6.89 (0.28) 42.11 (0.29) 3.29 (0.08) 6.68 (0.08) 1.65 (0.06) 222 (20.2) 56.8 (0.59) 6.34 (0.50) 7.35 (0.43) 55.66 (0.47) 2.66 (0.14) 6.50 (0.09) 2.22 (0.10) 829 (176.1)

- 158 -

 'HVFULSWLYH VWDWLVWLFV E\ VL]H FDWHJRULHV Until now only total samples have been considered. As discussed in &KDSWHU  and, for example, by Demartini and Kremp (1998) for French firms, disaggregation according to size categories is important as additional information may be added and the borrowing behaviour may differ from class to class. Therefore, we will present not only estimation results for all firms but also results, distinguished by size category. Consequently, in this section we present descriptive information for each size class of the French and German balanced panels. For Germany, five size classes are considered, as in &KDSWHU , for France, six classes, because enterprises under 10 employees might behave differently due to their recruiting process. 7DEOH  and )LJXUH % show that in the German panel there are - in relative perspective more "large firms", whereas more small and medium-sized firms are included in the French data set. The size of firms over the total distribution differs partly. For both panels the firmss average size is more or less similar unless the category 2,000 and more employees is considered. The size of the enterprises over 2,000 employees varies substantially. One key result of &KDSWHU  is confirmed by the balanced panel: debt defined as total creditors sharply decreases according to size class in Germany but not in France. This is illustrated by )LJXUH % for the year 1995. The downward movement of the cost of finance may also be correlated to size, even if the average interest ratess evolution of the German firms for class 2 and 3 as well as class 4 and 5 are relatively similar.23 On the other hand, we cannot find a clear relationship between profit and size. Above all, large firms are not more profitable than small ones. More generally, for most variables and for both countries, an obvious correlation with size does not exist. Nevertheless, the level of the collateral variable, which does not appear to vary widely across size, is much lower for the largest German firms.

23 A negative correlation between firm size and cost of finance is reported by Petersen and Rajan (1994) for US enterprises and by Elsas and Krahnen (1998) for German firms.

- 159 -

7DEOH  6L]H GLVWULEXWLRQ RI )UHQFK DQG *HUPDQ PDQXIDFWXULQJ ILUPV DQG GHVFULSWLYH VWDWLVWLFV RI WKH PDLQ YDULDEOHV E\ VL]H FODVV LQ 
Unweighted mean and (standard error of the mean), in % )UDQFH Size class Class 0 Class 1 Class 2 (by employees) (0 10) (10 - 20) (20 - 100) Number of firms 76 224 1,519  RI WRWDO    Number of employees Debt-to-total assets (Crtot) Growth rate of total assets (Grbal) Growth rate of turnover (Gturn) Collateral (Colts) Profit (Roi) Cost of finance (Rate1) Measure of risk (Risk1) *HUPDQ\ Size class (by employees) Number of firms  RI WRWDO Number of employees Debt-to-total assets (Crtot) Growth rate of total assets (Grbal) Growth rate of turnover (Gturn) Collateral (Colts) Profit (Roi) Cost of finance (Rate1) Measure of risk (Risk1) 7.8 (0.4) 58.6 (2.3) 4.1 (2.6) 4.9 (2.2) 43.30 (2.6) 3.2 (0.7) 7.0 (0.7) 2.0 (0.7) na 15.5 (0.4) 59.4 (1.2) 6.7 (0.1) 6.5 (1.2) 40.56 (1.4) 3.5 (0.3) 6.7 (0.3) 1.4 (0.2) Class 1 (1 - 20) 73  14.5 (1.0) 68.1 (2.4) 6.4 (3.2) 7.9 (2.4) 56.1 (2.5) 2.0 (0.5) 8.0 (0.5) 1.5 (0.3) 51 (0.7) 59.4 (0.4) 5.9 (0.4) 6.9 (0.4) 42.15 (0.4) 3.1 (0.1) 7.1 (0.1) 1.6 (0.1) Class 2 (20 - 100) 449  55 (1.3) 63.4 (0.9) 8.1 (0.9) 8.0 (0.8) 56.0 (0.8) 2.8 (0.2) 6.8 (0.2) 1.9 (0.1)

Class 3 (100 - 500) 841  214 (4.1) 59.2 (0.6) 5.3 (0.5) 7.4 (0.5) 42.62 (0.5) 3.4 (0.2) 6.3 (0.1) 1.6 (0.1) Class 3 (100 - 500) 518  213 (4.3) 57.2 (0.9) 5.5 (0.7) 7.0 (0.7) 58.0 (0.7) 2.4 (0.2) 6.5 (0.1) 2.4 (0.2)

Class 4 (500 - 2,000) 201  859 (29.7) 56.2 (1.0) 5.9 (1.0) 6.0 (0.9) 41.03 (1.0) 3.6 (0.3) 5.1 (0.3) 2.0 (0.3) Class 4 (500 - 2,000) 153  883 (31.4) 43.8 (1.4) 5.2 (1.2) 6.5 (0.9) 53.4 (1.3) 3.1 (0.4) 5.4 (0.2) 3.0 (0.3)

Class 5 (=> 2,000) 38  5,479 (1,246) 60.3 (2.6) 4.5 (1.5) 5.4 (1.7) 41.25 (2.4) 4.3 (0.6) 4.4 (0.4) 1.9 (0.4) Class 5 (=> 2,000) 82  9,586 (2,560) 32.4 (1.9) 4.3 (1.1) 7.1 (1.4) 43.0 (1.6) 3.6 (0.5) 5.8 (0.5) 2.2 (0.4)

- 160 -

)LJXUH  'HEWWRWRWDO DVVHWV

1.A: Trimmed and balanced (total) samples
           1988 1989 1990 1991 France 1992 1993 1994 1995

Germany

1.B: By size class in 1995

        
0 10 10 - 20 20 - 100 100 - 500 500 - 2000 => 2000 0 - 20 20 - 100 100 - 500 500 - 2000 => 2000
AhprBrh

Debt-to-total assets

% of firms in each class

Note: Unweighted mean, in % (see 7DEOHV  and 

- 161 -

)LJXUH  0DLQ YDULDEOHVs HYROXWLRQ

Growth rate of total assets

16 14 12 10 8 6

Growth rate of turnover

14 12 10 8 6 4 2

4 2 0 -2 1988 1989 1990 1991 France 1992 Germany 1993 1994 1995

0 -2 -4 -6 1988 1989 1990 1991 France 1992 1993 Germany 1994 1995

Collateral
70 60 50 40 30 20 10

Profit
5 4,5 4 3,5 3 2,5 2 1,5 1 0,5

0 1988 1989 1990 1991 France 1992 1993 Germany 1994 1995

0 1988 1989 1990 1991 France 1992 1993 Germany 1994 1995

Cost of finance
10 9 8 7 6 5 4 3 2 1 0 1988 1989 1990 1991 France 1992 1993 Germany 1994 1995 5 4,5 4 3,5 3 2,5 2 1,5 1 0,5 0 1988 1989 1990

Measure of risk

1991 France

1992

1993 Germany

1994

1995

Note: Unweighted mean, in % (see 7DEOH 

- 162 -

)LJXUH  /RQJWHUP WHQ\HDU LQWHUHVW UDWHV

12

10

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

France

Germany

)LJXUH  6KRUWWHUP WKUHHPRQWK LQWHUHVW UDWHV

12

10

1988

1989

1990

1991

1992

1993 France

1994

1995

1996 Germany

1997

1998

Note: Interest rates in % p.a.

- 163 -

 6WDQGDUG SDQHO DQDO\VLV VWDWLF PRGHO

The theory of finance described in 6HFWLRQ  provides us with several hints about potential determinants of enterprisess debt. The descriptive analysis points to size as a possible factor for Germany according of the cost-of-access approach while in France the main result is the sharp decrease in the debt ratio over time among all size classes due to tax policy (see &KDSWHU ). The next two 6HFWLRQV  and  focus on estimating a debt function for interpreting the behaviour of the firms with respect to leverage, including the balance sheet variables defined in 6HFWLRQ . The null hypothesis to be tested is the theorem of Modigliani-Miller, i.e. no variables are significant, which means that the capital structure is random. If "M-M" does not hold, modern theories of finance mainly based on asymmetric information are confirmed by empirical methods. We start with the "textbook" static model even though we are convinced that it is not the "best" specification. Instead, we prefer the dynamic model taking into account possible endogenous regressors. Nevertheless, the econometric studies available for France and Germany (see 6HFWLRQ ) restrict themselves to the static approach. This first step allows the reader to compare our results with the respective findings in the literature.  $QDO\VLV RI YDULDQFH Before we discuss the different formulations of the static econometric model, we present the variance analysis decomposition for the two countries, using a simple static model with year and size dummies and no firm dummies. This is a simple way to formalize the descriptive statistics reported above. The model is based on the following specification:

\ LW =  [LW +  [LW +  [LW +  [LW +  [LW + M + W + LW

L =  1  W = 7 DQG M =   

where \LW is the endogenous variable, here the debt ratio (Crtot) for firm L and year W, and [LW ,..., [LW are the exogenous right-hand-side variables defined above: growth of total assets or balance sheet total (Grbal) or turnover growth (Gturn), collateral, i.e. tangible fixed assets and stocks reported to total assets (Colts), profit reported to total assets (Roi), - 164 -

cost of finance: interest expenditure reported to financial debt (Rate1), measure of risk (Risk1). In the specification described above, the error term XLW is components: decomposed into three

a size effect M, which is a dummy equivalent for each firm L belonging to the same size class M, a year effect W, which reflects the inclusion of time dummies, LW the remainder, where the usual assumptions apply. The equation is estimated in levels. Two different versions are reported in 7DEOH : the first one (version 1) including total assets growth and the second one (version 2) relying on turnover growth. This kind of decomposition shows the explained variance of the model (line 1) and of each variable (column 1) as well as the contribution of each variable to the explained variance of the model (column 2). The table basically confirms two results underlined by the descriptive analysis: The time dimension plays a significant role in France (3.7 %) while it is almost nonexistent in Germany (0.1 %). Size, by contrast, shows a very small contribution to the model in France (0.3 %) while it is essential in Germany (12.7 % and 16.9 %) and represents roughly half of the explained variance. Among the explanatory variables, however, the hierarchy is the same for both countries: profit makes by far the largest contribution, then collateral and cost of finance, and finally the growth variables and the risk proxy. This first step emphasizes that if the total debt ratio is taken different over the period in France (10 percentage points decrease) and over the size classes in Germany (30 percentage points gap), the other explanatory (individual) variables seem to play a similar role in both countries. This result has now to be confirmed using more sophisticated econometric methods, i.e. by taking into account the specific heterogeneity of each firm, the problem of bias owing to measurement error or omitted variable and the possible endogeneity of some regressors in our model.

- 165 -

7DEOH  9DULDQFH DQDO\VLV FRQWULEXWLRQ RI HDFK IDFWRU WR WKH H[SODLQHG YDULDQFH 
)UDQFH - 2,899 firms *HUPDQ\ - 1,275 firms Version 1 Version 2 Version 1 Version 2 in % of % of in % of % of in % of % of in % of % of the variance the variance the variance the variance explained variance explained variance explained variance explained variance by each explained by each explained by each explained by each explained effect effect effect effect (1) (2) (1) (2) (1) (2) (1) (2) 25.7 100 25.1 100 36.8 100 35.4 100 3.7 0.3 0.05 1.0 2.4 14.8 2.9 0.7 14.3 1.0 0.2 3.9 9.2 57.6 11.2 2.6 3.7 0.3 0.05 1.3 2.3 14.9 2.1 0.6 14.6 1.1 0.2 5.2 8.9 59.7 8.2 2.2 0.1 12.7 0.04 1.1 4.5 6.6 2.5 0.02 0.5 46.0 0.2 3.8 16.4 24.0 9.0 0.1 0.2 16.9 0.05 0.7 5.7 9.4 2.3 0.0 0.5 47.8 0.2 2.0 16.2 26.7 6.6 0.01

Total variance explained (1) Year dummies Size class dummies Year*size class dummies Total assets growth (Grbal) Turnover growth (Gturn) Collateral (Colts) Profit (Roi) Cost of finance (Rate1) Measure of risk (Risk1)

 6WDWLF PRGHO IURP 2/6 WR ZLWKLQ As discussed in 6HFWLRQ  in detail, the enterprise data available are a combination of crosssection and time-series information. Usually, a debt equation based on such a data set is estimated by classical pooling or special methods of panel econometrics. Classical pooling is the well-known OLS procedure, assuming that all parameters are identical for all firms. However, this technique may be biased if the inherent heterogeneity of firms is neglected. Appropriate tests usually show that fixed or random effects models provide a better fit than pure classical pooling. These models explicitly take the differences between firms into account. Though the random effects model should be preferred for methodological reasons, its use within the framework of debt functions often cannot be supported. According to the Hausman test, the fixed effects model seems to be the suitable specification for our study of borrowing behaviour. This result is confirmed by Schwiete and Weigand (1997), where the fixed effects model turns out to be the preferred specification for Germany, and by - 166 -

other international investigations, such as Asgharian (1997). This also applies to our study where the fixed effects model rather than the random model proves to be the relevant specification. The static model has the form presented in 6HFWLRQ  but specific tests are made to determine the relevant structure of the error term. The error term XLW is now decomposed into three components as follows: the firm effect L (firm dummy), which can be correlated with the right-hand-side variables, the year effect W, LW the remainder (usual assumptions). 7DEOH  reports the results for France and Germany. Once again, two versions are tested which are based on alternative growth variables. For each country and each version, column 1 presents OLS estimates in levels with time dummies included while the model presented in column 2 controls for the possibility of unobserved firm-specific effects. The appropriate F-test (not reported in the table) confirms the existence of individual effects and enables us to reject the OLS estimates and to accept the existence of firm and year effects for both countries (column 2). The existence of firm effects indicates that the use of the OLS method may lead to upward-biased estimates.24 Random effects (individual specific constant terms being randomly distributed across cross-sectional units, i.e. individual effects are not correlated with the explanatory variables) are rejected by the Hausman test for both countries (column 3). Therefore, the fixed effects model allows us to relax the assumption that the same model applies to all individuals. Contrary to the null hypothesis of Modigliani-Miller, most variables of 7DEOH  (column 2) have highly significant coefficients and their signs being identical in both countries can be explained by the theories of finance discussed in 6HFWLRQ :25 Both growth variables have a positive sign, a finding which is consistent with the theory of signalling or with the idea that expanding firms need more external sources of financing.

24 Even a change of sign may occur when switching from OLS to fixed effects. 25 Nevertheless, as expected, most coefficients are larger in the OLS model than in the fixed effects model.

- 167 -

 The variable collateral, which can be interpreted as a proxy for secured debt, is positively correlated to leverage, which is in line with several theoretical approaches. The introduction of unobservable firm effects lowers the profitability estimate, which is negative and still significant. This negative correlation points to the fact that, according to the pecking order theory high-profit firms need fewer external funds. If, instead, the signalling hypothesis were valid we would expect a positive relationship. The risk variable, which - in line with the traditional approach - has a negative coefficient for both countries in the OLS equation, is not significant any more. Finally, the relationship between debt and cost of finance (Rate1) is also quite different from the one provided by OLS and shows a pretty unstable behaviour. In France, the relationship is positive with a much smaller coefficient when the growth of total assets is used and becomes negative when the model contains the turnover growth. In Germany, the correlation in the fixed effects model is negative in both cases.

- 168 -

7DEOH  6WDWLF GHEW HTXDWLRQ HVWLPDWHG LQ OHYHOV IURP 2/6 WR ZLWKLQ 
)UDQFH Version 1: Grbal as growth variable (2) (2) with OLS - time (1) plus estimated dummies fixed firm random by size effects, effects, included, class 2,899 firms 2,899 firms 2,899 firms (1) (2) (3) (4) 0.216*** 0.114*** 0.119*** (0.006) (0.003) (0.003) 0.099*** 0.106*** 0.106*** 0.091*** 0.076*** 0.052*** 0.010 0.062*** 0.062*** (0.007) (0.007) (0.006) -0.082*** 0.024 0.022*** 0.041*** -0.005 -0.160** -1.373*** -0.551*** -0.589*** (0.023) (0.012) (0.012) -0.391*** -0.443*** -0.492*** -0.502*** -0.520*** -0.561*** 0.572*** 0.046*** 0.102*** (0.020) (0.016) (0.015) -0.045 -0.022 -0.079*** -0.153*** -0.197*** -0.351** -0.349*** 0.000 -0.018 (0.025) (0.012) (0.012) -0.020 -0.000 0.015 0.000 0.022 -0.047 0.0 0.906 0.177 Version 2: Gturn as growth variable (2) (2) with OLS - time (1) plus estimated dummies fixed firm random by size effects, effects, included, class 2,899 firms 2,899 firms 2,899 firms (1) (2) (3) (4) 0.211*** 0.098*** 0.102*** (0.007) (0.003) (0.003) 0.052*** 0.044*** 0.061*** 0.057*** 0.054*** 0.027 0.008 0.059*** 0.059*** (0.007) (0.007) (0.006) -0.088*** -0.013 0.004 0.022** -0.041 -0.197*** -1.376*** -0.563*** -0.602*** (0.022) (0.012) (0.012) -0.349*** -0.458*** -0.500*** -0.527*** -0.533*** -0.566*** 0.484*** -0.140*** 0.077*** (0.020) (0.016) (0.015) -0.311*** -0.250*** -0.355*** -0.411*** -0.347*** -0.477*** -0.320*** 0.013 -0.006 (0.026) (0.012) (0.012) -0.003 -0.011 0.020* 0.004 0.016 -0.049 0.0 0.249 0.904 0.143

Grbal or Gturn Grbal or Gturn by size class Colts Colts

(0) (1) (2) (3) (4) (5)

(0) (1) (2) by (3) size (4) class (5) Roi (0) (1) (2) by (3) size (4) class (5) Rate1 (0) (1) (2) by (3) size (4) class (5) Risk1 Risk1 Rate1 Roi

(0) (1) (2) by (3) size (4) class (5) Hausman test (Pvalue) R 0.256

Standard errors in parentheses. *: p = 0.1, **: p = 0.05, ***: p = 0.01.

- 169 -

7DEOH  FRQWLQXHG
*HUPDQ\ Version 1: Grbal as growth variable (2) (2) with OLS - time (1) plus dummies fixed firm random estimated by size effects, effects, included, class 1,275 firms 1,275 firms 1,275 firms (1) (2) (3) (4) 0.231*** 0.093*** 0.099*** (0.011) (0.004) (0.004) 0.088*** 0.089*** 0.091*** 0.134*** 0.106*** 0.26*** 0.168*** 0.186*** (0.012) (0.011) (0.012) 0.186*** 0.188*** 0.139*** 0.191*** 0.083* -1.071*** -0.803*** -0.817*** (0.039) (0.021) (0.021) -0.747*** -0.948*** -0.763*** -0.686*** -0.388*** 1.241*** -0.108*** -0.024 (0.051) (0.031) (0.030) -0.002 -0.098* -0.097* -0.247** -0.177* -0.239*** 0.011 -0.002 (0.065) (0.029) (0.029) -0.135 -0.108* -0.067 0.060 0.041 0.0 0.906 0.212 Version 2: Gturn as growth variable (2) (2) with OLS - time (1) plus estimated random fixed firm dummies by size effects, effects, included, class 1,275 firms 1,275 firms 1,275 firms (1) (2) (3) (4) 0.198*** 0.064*** 0.069*** (0.013) (0.005) (0.005) 0.054*** 0.069*** 0.059*** 0.110*** 0.045* 0.252*** 0.152*** 0.171*** (0.012) (0.011) (0.011) 0.177*** 0.181*** 0.119*** 0.115*** 0.054 -1.145*** -0.842*** -0.859*** (0.040) (0.022) (0.022) -0.801*** -1.01*** -0.794*** -0.736*** -0.371*** 1.056*** -0.271*** 0.192*** (0.051) (0.030) (0.030) -0.164 -0.267*** -0.269* -0.430*** -0.243** -0.168** 0.038 0.027 (0.066) (0.029) (0.029) -0.171 -0.046 0.081* 0.100 0.023 0.0 0.217 0.903 0.183

Grbal or Gturn Grbal or (1) Gturn (2) by (3) size (4) class (5) Colts Colts (1) (2) by (3) size (4) class (5)

Roi (1) (2) by (3) size (4) class (5) Rate1 Rate1 (1) (2) by (3) size (4) class (5) Roi

Risk1 Risk1

(1) (2) by (3) size (4) class (5) Hausman test (Pvalue) R 0.237

Standard errors in parentheses. *: p = 0.1, **: p = 0.05, ***: p = 0.01.

- 170 -

In spite of the advantages in comparison with OLS, the fixed effects model has nevertheless two drawbacks: as we have just seen, coefficient estimates can get more imprecise because a lot of variability is lost and variables that do not vary over time cannot be estimated. As 7DEOH  illustrates, especially the explanatory variable collateral has the main part of its variability in the between dimension and may become difficult to estimate.

7DEOH  9DULDELOLW\ GHFRPSRVLWLRQ VKDUH RI WKH EHWZHHQ YDULDELOLW\ LQ WKH WRWDO YDULDELOLW\  )UDQFH - 2,899 firms Debt-to-total assets: Crtot Total assets growth: Grbal Turnover growth: Gturn Collateral with stock: Colts Collateral: Colta Profit: Roi Cost of finance: Rate1 Measure of risk: Risk1
0.85 0.15 0.14 0.86 0.86 0.47 0.74 0.27

*HUPDQ\ - 1,275 firms

0.88 0.14 0.15 0.83 0.91 0.51 0.58 0.25

Note: Total variability = within variability + between variability

(\
L W

LW

\ ) 2 = ( \ \ ) 2 + 7 ( \ \ ) 2
LW L L L W

 6RPH LQLWLDO UHVXOWV E\ VL]H FODVV The size variable is of course an example of regressors that cannot any longer be included in a fixed effects model because the variation over time is too small. Therefore, the size dimension should be taken into account by estimating the model by size class. This is done by estimating the following model:
\ = 1 [1 + 2 [ 2 + 3 [3 + 4 [ 4 + 5 [5 + + + ,
LW M LW M LW M LW M LW M LW L W LW

where M   , for the six size variables defined earlier. If the year effect is also allowed to vary by size class, it is equivalent to estimating this model for each size class. This is what is done in 7DEOH . We do not intend to comment in detail on the differences by size class, because it has already been underlined that for several reasons more sophisticated techniques should be used (see 6HFWLRQ ). Nevertheless, this static model indicates that the behaviour by size class is worth further investigation.

- 171 -

 )LUVW GLIIHUHQFHV VRPH DQVZHUV WR VLPSOH TXHVWLRQV ZLWK WKH VWDWLF PRGHO In principle, three ways of tackling the problem of unobservable firm effects exist. The first one is to introduce firm dummies; the second one, which should lead to the same results, is to remove the firm means from all variables, estimating the following model (this is done in 7DEOH , column 2):
\ \ = 1 ( [1 [1 ) + 2 ( [2 [2 ) + 3 ( [3 [3 ) K+
LW L LW L LW L LW L LW L

The procedure removes the firm effect L but may contaminate the disturbance LW with the disturbances from the other years included in the mean. This might occur if measurement errors are correlated over time and when lagged explanatory variables are used as instruments. These two reasons explain why using a third method, by estimating the model in first differences (7DEOH , column 1), does not always give equivalent results to the within specification. Comparing the results of within and first differences, we see that above all the risk variable has very different estimates. This suggests that measurement errors or/and a simultaneity bias might be present in the data, which should be taken into account by instrumental variables methods (IV) or by the generalized method of moments (GMM). As pointed out by several authors, first difference coefficients tend to be more biased towards zero than within coefficients (Mairesse and Hall, 1996; Griliches and Hausman, 1986). Indeed, our estimates are in line with these results, i.e. most of the significant estimates are smaller in first differences (7DEOH , column 1) than in within (7DEOH , column 2). In the next section we concentrate on the dynamic specification and on possible endogeneity of the regressors. The presence of the lagged explanatory variable and the estimated instabilities seem to recommend the use of GMM to correct for the several biases already underlined. However, before we move to more sophisticated methods, this basic model can help us to find some further hints to the nature of the debt ratioss time trend already discussed in 6HFWLRQV  and  The basic question to be answered now is whether the variation of the firmss leverage over time differs by size class. Therefore, 7DEOH  presents a model estimated in first differences where time dummies are replaced by a time trend.

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In France, the intercept is negative (-1.7) and the time trend is significant and positive (column 1).26 When the time trend is allowed to vary by size class, the last size category is used as the reference (column 2). All the other coefficients are significant and negative, but very similar to each other. The third column shows that when the last size class (firms larger than 2,000 employees) is excluded from the model, then time trends by size class are not significant any more. Appropriate tests (not reported here) confirm that differences among size class trends are not significant. The last column contains the time dummies by year, confirming that the reduction of leverage has started at the beginning of the period under review. The main conclusion of these tests for France is that there is no difference per size category in the lowering of debt over time. In Germany, as to be expected, the intercept coefficient is small but positive, and the time trend has a negative sign (first column). The time trend by size class, however, is not significant (columns 2 and 3) and the year dummies combined with the intercept confirm the fact that the debt ratioss decrease over time is rather slight and confined to the early nineties.

26 The sign of the time coefficient is positive. However, the model is estimated in first differences and the intercept is negative. Therefore, this positive sign should be interpreted as a decrease in the lowering of debt.

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7DEOH  'HEW EHKDYLRXU VWDWLF PRGHO HVWLPDWHG LQ ILUVW GLIIHUHQFHV ZLWK WLPH WUHQGV 
)UDQFH
OLS with time trend included, 2,899 firms (2) with size class 5 (1) with time trend size class 5 excluded, year excluded by size dummies class and time trend

*HUPDQ\
(2) with size class 5 (1) with OLS with time time trend size class 5 excluded, year excluded by size trend dummies class included, and time 1,275 trend firms

(1) Intercept -1.721*** (0.071) Time 0.100*** trend (0.016) Year dummies 1989 1990 1991 1992 1993 1994 1995 Time (0) trend (1) (2) by (3) size (4) class (5) Grbal 0.102*** (0.001) Colts 0.026*** (0.005) Roi -0.476*** (0.008) Rate1 -0.096*** (0.011) Risk1 -0.017*** (0.007) R 0.30

(2) -1.721*** (0.071) 0.298*** (0.063)

(3) (4) -1.721*** -0.270 (0.071) (0.198) 0.103*** (0.030)

(1) (2) 0.291* 0.291* (0.167) (0.167) -0.127*** -0.120 (0.037) (0.073)

(3) (4) 0.299* -0.783** (0.175) (0.373) -0.139** (0.060)

-0.210*** -0.196*** -0.219*** -0.169*** -0.194*** 0.000 0.102*** (0.001) 0.026*** (0.005) -0.476*** (0.008) -0.096*** (0.011) -0.017** (0.007) 0.30

-0.015 -0.002 -0.025 -0.025 0.000 0.102*** (0.001) 0.026*** (0.005) -0.476*** (0.008) -0.096*** (0.001) -0.349*** (0.025) 0.30

-0.586*** -1.050*** -1.707*** -1.835*** -1.718*** -0.418*** 0.000 -0.015 -0.002 -0.024 -0.026 0.000 0.101*** (0.001) 0.022*** (0.005) -0.485*** (0.008) -0.094*** (0.001) 0.008*** (0.007) 0.32

na na -0.067 -0.084 0.014 -0.003 0.017 0.001 0.000 -0.016 0.000 0.086*** 0.086*** 0.086*** 0.084*** (0.003) (0.003) (0.003) (0.003) 0.119*** 0.119*** 0.118*** 0.118*** (0.010) (0.010) (0.010) (0.010) -0.620*** -0.620*** -0.637*** -0.648*** (0.016) (0.017) (0.017) (0.017) -0.366*** -0.366*** -0.366*** -0.358*** (0.023) (0.023) (0.024) (0.024) -0.058*** -0.058*** -0.056** -0.030 (0.021) (0.021) (0.022) (0.022) 0.26 0.26 0.26 0.27

1.013*** 1.696*** -0.311 0.067 -0.013 1.164*** 0.000 na -0.066 0.014 0.017 0.000

Standard errors in parentheses. *: p = 0.1, **: p = 0.05, ***: p = 0.01.

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 '\QDPLF VSHFLILFDWLRQ RI WKH GHEW IXQFWLRQ27

 (VWLPDWLRQ SURFHGXUH Testing dynamic models is often justified by the existence of so-called adjustment costs. In the context of panel econometrics, two dynamic specifications are usually discussed in the literature: the so-called partial adjustment model, which is characterized by simply adding the lagged endogenous variable to the static fixed effects approach, and using current exogenous regressors. Furthermore, the rational-lag model (or autoregressive distributed lag model) can be found when lagged exogenous variables are employed additionally. In our study, the partial adjustment approach is applied to the debt equation.28 Therefore, the dynamic model to be estimated is specified as follows:
\ = 0 \
LW

LW

+ 1 [1 + 2 [ 2 + 3 [ 3 + 4 [ 4 + 5 [5 + + +
LW LW LW LW LW L W

LW

L = 1,K , 1 and W = 1,K , 7 The introduction of the lagged endogenous variable raises the issue of the simultaneity of the residual and the lagged variable.29 To overcome this problem, instrumental variable methods applied on first differences (in order to eliminate the fixed firm effects) enable endogeneity to be taken into account by using lagged regressors as instruments. Anderson and Hsiao (1982) proposed the second lag of the endogenous variable (either in levels or first differences) as instruments. Arellano and Bond (1991) have shown that this procedure results in consistent, but not necessarily efficient estimators. To improve efficiency, they linked this approach with GMM.30 This two-step method allows to control for heteroscedasticity across firms, correlation of the errors over time, simultaneity and measurement errors by using orthogonality conditions on the matrix of variancecovariance.

27 We are very grateful to Pierre Blanchard and Patrick Sevestre of the University Paris - Val de Marne for making available to us their own GMM programs written in SAS and giving us valuable hints on GMM pitfalls. 28 Virolainen (1998) estimates a rational-lag specification of the debt function for Finnish firms. 29 Nickell (1981) underlines the potential downward-biased estimates of the autoregressive coefficient in panels with a small number of time periods: the estimation is biased by 1/T. 30 Sevestre and Trognon (1996b) present a survey of the estimation of dynamic linear models, including the application to the random effects specification. Modifications of the Arellano-Bond procedure are discussed by Baltagi (1995) and above all by Blundell and Bond (1998).

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However, in our study we do not exactly apply their proposal. Instead, susuals GMM which is based on a more restrictive matrix of instruments is employed.31 With respect to this, we present second-step results of the estimations and the relevant test statistics to check the validity of instruments.32 The debt equations are estimated over the 1991-95 period using the lagged left-hand variable and, dependent of the model specification, lagged right-hand variables in levels as instruments.33 The test for selected variables and the choice of the adequate set of instruments result in a huge number of regressions. Therefore, in the following sections we present only the most interesting ones. Furthermore, the borrowing behaviour of the French and German firms is checked for the full samples and for the different size classes.  ([RJHQRXV VSHFLILFDWLRQ RI WKH G\QDPLF ERUURZLQJ EHKDYLRXU The first model assumes that all right-hand-side regressors are exogenous, as in the static case. The lagged debt variable (in first differences) is instrumented by Crtot in levels lagged t-3 and t-4. The results for the French and German firms are shown in 7DEOH  separately for the different growth variables Grbal and Gturn as the borrowing behaviour in general depends on the way defining internal firm growth. Before discussing the GMM results in more detail, the OLS estimations included in 7DEOH  have to be commented on. For the sake of completeness, OLS is applied to the dynamic debt equation in first differences (model 0). By construction the fixed effects are eliminated, nevertheless the estimation results are biased because of the correlation between the lagged debt and the residual. The most pronounced difference in the results of the biased OLS procedure (model 0) and the GMM procedure (model 1) consists of the coefficient of the lagged debt variable. The OLS lagged coefficients for the French and German firms are clearly downward-biased. The lagged coefficients of model 1 are positive and highly significant, a finding that supports the dynamic specification. What is interesting is the fact that the adjustment speed of the French firms is lower than of their German counterparts. This result is in line with 6HFWLRQV  and  where it can be shown that in the French case the time dimension constitutes a very important variable explaining the evolution of enterprisess debt. The estimates of the equation, which includes the growth rate Grbal (version 1), are identical

31 sUsuals GMM involves a limited number of lagged regressors as instruments, whereas the estimator of Arellano and Bond includes all available lags. E.g. Elston (1993) applies susuals GMM to estimate an investment function for German firms based on panel data. 32 The results presented here are based on a set of instruments not differentiated each year. Preliminary results (not reported here) show that the explosion of the matrix of instruments by defining one set each year gives much less reliable results with both samples. 33 In comparison with the static model, the estimation period is reduced here because of the lags necessary to construct the instruments.

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with respect to the sign for both samples. This observation can be interpreted as similar behaviour of French and German firms. Nevertheless, some obvious differences between both samples can be found. Above all, the short-run influence of the variables collateral (Colts) and cost of finance on total debt (Rate 1) seem to be much stronger for the German firms. If the long-run relationship is considered, however, the reaction of the French firms exceeds the impact of the significant variables on the German enterprises a lot, with the exception of the determinant collateral.34 The borrowing behaviour of model 1 shows diverging outcomes when changing the growth variable (version 2). This could be interpreted as a difference between total assets growth (Grbal), controlling for long-run firm expansion effects, and the growth rate of turnover (Gturn), controlling for short-run ones. In the German case, Gturn is now negative contradicting even the static fixed effects regression35 and the influence of the cost of finance on the demand for total creditors increases significantly. The last effect is also relevant for the French firms. What is surprising in the case of version 2 is the negative sign of the collateral proxy Colts for the French sample.36 Important criteria for the GMM estimation and its instruments are the Sargan test and m2test. The Sargan test indicates whether the instruments and the residuals of the equation to be estimated are independent, a necessary prerequisite for the validity of the instruments. According to the Sargan statistics, the specification of model 1 can be accepted as the null hypothesis of no correlation (between instruments and residuals) is not rejected. A different result is provided by the m2-indicator, which shows that crucial second-order serial correlation of the residuals arises.37

34 The tables in 6HFWLRQV  and  explicitly show the estimated adjustment and short-run coefficients. The long-run relationship can be calculated by dividing the short-run value by 1 minus adjustment coefficient. 35 It is worthwhile mentioning that Bond et al. (1997) find a negative impact of the turnover growth on investment for German firms, but a positive relationship for Belgium, France and UK. 36 This result also holds for the alternative definition Colta (tangible fixed assets only), whereas for the German data no significant influence of Colta can be detected. 37 The consistency of the GMM approach is based on the absence of second-order correlation. This condition is fulfilled if the residuals of the original debt equation in levels are not correlated. Then the instruments lagged t-2, t-3, ... can be used. In the case of a MA(1)-process, the lag of the instruments must start at least by t-3.

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7DEOH  '\QDPLF ERUURZLQJ EHKDYLRXU ZKHQ DOO H[SODQDWRU\ YDULDEOHV DUH H[RJHQRXV  )UDQFH Version 1 Crtot-1 Model 0 Model 1
0.854*** (0.046) 0.189*** (0.008) 0.019** (0.009) -0.770*** (0.022) -0.292*** (0.028) 0.020 (0.016) 2,899 11 12 0 0.85 0.04 0.83

*HUPDQ\ Model 0
0.074*** (0.018) 0.097*** (0.006) 0.106*** (0.016) -0.619*** (0.038) -0.416*** (0.038) -0.030 (0.032) 1,275 11 0 0 0

)UDQFH Version 2 Crtot-1 Model 0 Model 1

0.869*** (0.055) 0.057*** (0.005) -0.055*** (0.012) -0.729*** (0.024) -0.745*** (0.043) 0.024 (0.017) 2,899 11 12 0 0.04 0.88 0.34

*HUPDQ\ Model 0
-0.017 (0.016) 0.021*** (0.006) 0.067*** (0.018) -0.617*** (0.037) -0.554*** (0.040) -0.032 (0.032) 1,275 11 0 0 0

Model 1
0.545*** (0.048) 0.136*** (0.080) 0.116*** (0.018) -0.681*** (0.045) -0.724*** (0.063) 0.004 (0.040) 1,275 11 12 0.0001 0.0005 0.17 0.68

Model 1
0.585*** (0.055) -0.017* (0.009) 0.036* (0.021) -0.654*** (0.046) -1.046*** (0.076) -0.005 (0.040) 1,275 11 12 0 0.012 0.45 0.51

0.279*** (0.015) 0.135*** Grbal (0.005) 0.023*** Colts (0.008) -0.569*** Roi (0.014) -0.164*** Rate1 (0.019) 0.012 Risk1 (0.012) 2,899 N 11 0 PK m1 (Pvalue) 0 m2 (Pvalue) 0.02

0.078*** (0.012) 0.060*** Gturn (0.004) -0.006 Colts (0.010) -0.495*** Roi (0.014) -0.403*** Rate1 (0.023) 0.014 Risk1 (0.012) 2,899 N 11 0 PK m1 (Pvalue) 0 m2 (Pvalue) 0.94

Sargan Pvalue

Sargan Pvalue

N firms, P parameters, K instruments, robust standard errors in parentheses. *: p = 0.1, **: p = 0.05, ***: p = 0.01. All models are estimated in first differences including time dummies, instruments of model 1 are in levels. Model 0: OLS, no instruments. Model 1: GMM (second-step results), instruments: lagged endogenous t-3 and t-4, other explanatory variables exogenous.

According to 7DEOH , the null hypothesis is rejected in 3 of 4 regressions on the 5 percent level. To summarize, the results of model 1 convey some interesting information on the firmss debt equation.38 First, the lagged coefficient cannot be neglected indicating that adjustment costs seem to play a major role in describing the borrowing behaviour of French and German enterprises. Second, the specification based on Grbal, the long-term growth rate of total assets, provides more plausible results for both countries with respect to the theory of corporate finance outlined in 6HFWLRQ . Here the positive signs of long-run firm growth and the collateral proxy support the signalling approach. Finally, including the findings of the static model, until now a few very stable relationships between debt and its possible determinants seem to exist for France and Germany. On the one hand, the expected negative impact of the cost of finance emphasizes the sensitivity of the firmss demand for credit to interest rates; on the other hand, the negative sign of the profit variable is in line with the pecking order theory and is confirmed for both countries by the comparative study of Ramb (1998).  '\QDPLF GHEW IXQFWLRQ DQG HQGRJHQRXV UHJUHVVRUV Model 1 is based on the assumption that all right-hand regressors except the lagged Crtot are exogenous determinants of debt. No question, this is a rather controversial hypothesis. Due to the fact that all indicators are calculated from balance sheet data, it is hard to imagine that really exogenous variables exist. We now give up the exogeneity approach and admit all variables to be endogenous.39 In order to take overall simultaneity into account, all righthand-side regressors are instrumented. As discussed in 6HFWLRQ , such a proceeding can be justified by the existence of measurement errors, too, which may be relevant for all variables.40 Introducing instruments always raises a few technical questions. First, they have to be independent of the residuals, which is tested by the Sargan statistics. Second, they should be correlated with the regressors to have a high power of explanation. This often proves to be a critical point, above all when the variables in levels lagged t-2 or more have to be used to approximate the first difference regressors.41 Therefore it is not surprising that the precision
38 When discussing the results for France and Germany, the diverging number of firms may influence the comparison. To control for sample size various French random samples with 1,275 enterprises are estimated. The outcomes of these regressions are very stable, the main difference being the precision of the estimate. Therefore, we can conclude that similarities or differences in the borrowing behaviour do not depend on the higher number of French enterprises. 39 "Working with company accounts data, it is reasonable to assume that most of the variables are simultaneously determined." (Virolainen, 1998, p. 93) 40 The subject measurement error and panel data is discussed by Baltagi (1995). 41 For a detailed discussion of the problem of weak instruments see Hall et al. (1998).

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of the estimations becomes worse. However, in most cases the Sargan and m2-statistics now have acceptable values which support our endogenous specifications.42 7DEOH  includes the results of models 2 and 3 separately for Grbal and Gturn. In model 2, all explanatory variables are instrumented by the lagged levels t-2, in model 3, by t-2 and t-3, which increases the number of instruments. The decrease in the precision of the estimation in comparison with model 1 is demonstrated by the fact that collateral and (with one exception) cost of finance are no longer significant, and the growth rate serves as a determinant of debt only in selected cases. It should be mentioned that, for German firms, model 2 now shows a positive sign for Gturn, as in the static fixed effects specification. In a certain sense, the endogenous approach improves the estimation by illuminating a possible impact of the risk variable on debt. For the French and German enterprises, a positive relationship is now demonstrated, which is contrary to traditional considerations, but in line with the theory of Myers (1977).43 The variable which seems to be rather robust to changes in the models is the determinant profit. All regressions show a strong negative influence, which is in line with the theory of pecking order. Together with the lagged endogenous variable, both indicators prove to be the principal elements of the dynamic debt equation, a result which can be found to be valid for studies of the investment behaviour, too.44

42 In the German case, the poor values of m2 when using Grbal indicate that this growth variable may be responsible for the serial correlation of the error term. Eliminating Grbal as regressor, for example, supports the null hypothesis of sno second-order correlations. 43 Kim and Sorensen (1986) for US firms and Michaelas et al. (1998) for UK firms also report a positive relationship. For Germany, Schwiete and Weigand (1997) estimate a positive risk coefficient when all regressors are assumed to be exogenous. In case of endogeneity of the determinant profit, the sign of risk changes. 44 See, for example, Hall (1992). Her conclusion can directly be transferred to our results: "However, the price of achieving consistency in the parameter estimates is an increase in the standard errors which renders all of the predictor variables insignificant except for the lagged endogenous variables and possibly the profits variable." Hall (1992, p. 18)

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7DEOH  '\QDPLF ERUURZLQJ EHKDYLRXU ZKHQ DOO H[SODQDWRU\ YDULDEOHV DUH HQGRJHQRXV  )UDQFH Version 1 Crtot-1 Grbal Colts Roi Rate1 Risk1 N PK m1 (Pvalue) m2 (Pvalue) Sargan Pvalue Model 2
0.796*** (0.047) 0.317*** (0.065) -0.048 (0.050) -0.806*** (0.105) -0.002 (0.064) 0.188 (0.117) 2,899 11 12 0 0.85 0.19 0.66

*HUPDQ\ Model 2
0.492*** (0.051) 0.176 (0.161) 0.089 (0.138) -0.595** (0.264) -0.253 (0.327) 0.496* (0.256) 1,275 11 12 0 0.07 0.07 0.79

)UDQFH Version 2 Crtot-1 Model 2 Model 3

0.715*** (0.047) 0.061 (0.043) 0.008 (0.060) -0.362*** (0.058) 0.059 (0.060) 0.075 (0.105) 2,899 11 17 0 0.08 12.83 0.05

*HUPDQ\ Model 2
0.455*** (0.085) 0.093 (0.140) 0.132 (0.161) -0.388* (0.202) 0.040 (0.219) 0.541* (0.311) 1,275 11 12 0 0.97 0.36 0.55

Model 3
0.773*** (0.043) 0.311*** (0.055) -0.069 (0.047) -0.819*** (0.094) -0.015 (0.055) 0.254*** (0.102) 2,899 11 17 0 0.93 6.87 0.33

Model 3
0.499*** (0.048) 0.161** (0.069) 0.096 (0.089) -0.471*** (0.130) -0.113 (0.138) 0.688*** (0.213) 1,275 11 17 0 0.004 8.87 0.18

Model 3
0.441*** (0.056) 0.100* (0.061) 0.107 (0.096) -0.377*** (0.134) 0.027 (0.143) 0.638*** (0.237) 1,275 11 17 0 0.94 9.72 0.14

0.610*** (0.116) 0.282 Gturn (0.174) -0.229 Colts (0.186) -0.226** Roi (0.113) -0.283** Rate1 (0.127) 0.137 Risk1 (0.177) 2,899 N 11 12 PK m1 (Pvalue) 0 m2 (Pvalue) 0.06 0.01 Sargan 0.93 Pvalue

N firms, P parameters, K instruments, robust standard errors in parentheses. *: p = 0.1, **: p = 0.05, ***: p = 0.01. All models are estimated in first differences including time dummies, instruments are in levels. Model 2: GMM (second-step results), instruments: lagged endogenous t-3 and t-4, other explanatory variables lagged t-2. Model 3: GMM (second-step results), instruments: lagged endogenous t-3 and t-4, other explanatory variables lagged t-2 and t-3.

In this section we have tested the consequences of admitting simultaneity of all variables. Because of the loss of precision, which seems to be the price of a very general and consistent specification, we now want to go a step backwards and assume that some of the variables are exogenous, some of them endogenous. The sensitivity of the results of such a smixeds model will be checked next.  $ sPL[HGs G\QDPLF PRGHO The so-called scompromises model 4 presented in 7DEOH  relies on the basic assumption that the variables growth rate, profit and cost of finance are exogenous whereas collateral and risk are instrumented by their lagged values. Besides the endogeneity of these indicators, potential measurement errors are a second reason for such a procedure. Indeed, especially the collateral and risk proxy seem to be very complex variables which are difficult to be calculated correctly from enterprise balance sheet data only (see 6HFWLRQ ). For example, it is quite obvious from &KDSWHU  that collateral cannot be adequately described by a ratio; moreover, the specific legal regulations must be taken into account. 7DEOH  s0L[HGs G\QDPLF PRGHO  )UDQFH *HUPDQ\ Model 4
0.870*** (0.054) 0.195*** (0.009) 0.104* (0.055) -0.715*** (0.036) -0.297*** (0.0366) 0.156* (0.097) 2,899 11 13 0 0.98 1.59 0.45 0.545*** (0.049) 0.136*** (0.010) 0.113 (0.088) -0.625*** (0.052) -0.692*** (0.064) 0.628*** (0.215) 1,275 11 13 0 0.0003 6.13 0.05

Version 1 Crtot-1 Grbal Colts Roi Rate1 Risk1 N PK m1 (Pvalue) m2 (Pvalue) Sargan Pvalue

Version 2 Crtot-1 Gturn Colts Roi Rate1 Risk1 N PK m1 (Pvalue) m2 (Pvalue) Sargan Pvalue

)UDQFH *HUPDQ\ Model 4

0.948*** (0.074) 0.074*** (0.007) 0.280*** (0.077) -0.642*** (0.039) -0.869*** (0.071) 0.088 (0.115) 2,899 11 13 0 0.03 2.65 0.26 0.594*** (0.057) -0.003 (0.011) 0.164* (0.088) -0.586*** (0.053) -1.044*** (0.080) 0.637*** (0.226) 1,275 11 13 0 0.051 3.26 0.20

N firms, P parameters, K instruments, robust standard errors are in parentheses. *: p = 0.1, **: p = 0.05, ***: p = 0.01. All models are estimated in first differences including time dummies, instruments are in levels. Model 4: GMM (second-step results), instruments: lagged endogenous t-3 and t-4, Risk1 lagged t-2 and t-3, Colts lagged t-2, other explanatory variables exogenous.

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The main result is that now each of the variables may be significant and have signs which can be well explained by theory. But, once again, model 4 shows clearly that the coefficients of a debt equation depend on the calculation of the growth rate. For example, if Grbal is used collateral seems to be immaterial to German firms, which is in flat contradiction with the traditional argumentation and the findings in &KDSWHU . Again, the precision of the estimation decreases when the instruments are of poor quality. In the light of all the uncertainties mentioned, it seems unwarranted to try to explain the borrowing behaviour of firms by one model only. As this study proves, the true sfeelings for the relevant determinants of debt can only be gained by testing a variety of models, including different variables or proxies.

 '\QDPLF HVWLPDWLRQ E\ VL]H FODVV The regressions considered in the previous sections are based on the full French and German samples. In 6HFWLRQ  however, we emphasized the necessity of studying the sizespecific behaviour of firms. In this paragraph, we want to take up this idea again, and check the borrowing behaviour of different size classes in a dynamic context. For estimation purposes model 1 - all regressors exogenous - is chosen again, as the results can be compared with the static fixed effects case and the difference to model 4 lies within a certain range. On the one hand, estimation by size category may improve the precision as the heterogeneity bias is reduced. But on the other hand, a further crucial problem arises. The GMM properties are based on large samples, a fact which is not fulfilled by all size classes. Hence the regressions in which the sample is below 100 firms must be considered very cautiously, and are not commented on here in detail. In a way, the French firms of the different size classes exhibit very stable and uniform behaviour (see 7DEOH ). The endogenous lagged variable, the growth indicators, profit and cost of finance have the same sign from category 1 to 4. The proxies for collateral and risk once again prove to be problematic. Collateral has a counter-intuitive positive impact on debt only in the case of large medium-sized firms. Besides lagged total creditors, the variables profit and cost of finance are the most important determinants of enterprisess debt. For all size classes the pecking order theory and a clear adverse impact on the overall demand for credit are confirmed. It is worthwhile mentioning that, on the whole, the shortrun and long-run sensitivity to the firm-specific interest rate increases significantly with the size of the enterprises. The results for the German samples differ from those for the French ones in two main directions. The short-term growth proxy Gturn seems not to be a relevant determinant of

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debt, whereas collateral proves to be important, above all, for small and medium-sized firms. This finding supports the role of collateral as a signalling device, above all towards banks. As in the French case, the reaction to interest rates increases with firm size. Furthermore, the regressions for the German corporations highlight a special short-run profit behaviour, much clearer than that for French firms, i.e. the relationship between debt and profit with respect to size class can be described as an inverse U-shaped function. This observation, however, cannot be supported for the German firms in the long-run. The samples of both size class 1 and 5 are small. Nevertheless, the debt behaviour of the firms below 20 employees can be explained satisfactorily by the dynamic specification.

- 184 -

7DEOH  '\QDPLF ERUURZLQJ EHKDYLRXU E\ VL]H FODVV  )UDQFH Version 1 Crtot-1 Class 0 Model 1 Class 1 Class 2 Class 3 Class 4 Class 5 Version 2 0.772*** 0.806*** 0.972*** 0.921*** 0.852*** Crtot-1 Class 0 Class 1
0.937*** (0.163) 0.035* (0.019) -0.078* (0.042) -0.647*** (0.068) -0.580*** (0.103) 0.037 (0.056) 224 11 12 0 0.47 0.37 0.54

Class 2
0.854*** (0.083) 0.067*** (0.007) -0.056*** (0.016) -0.768*** (0.036) -0.710*** (0.052) 0.041* (0.025) 1,519 11 12 0 0.08 0.37 0.83

Class 3
0.940*** (0.116) 0.047*** (0.013) -0.024 (0.026) -0.731*** (0.044) -0.924*** (0.092) 0.028 (0.028) 841 11 12 0 0.60 2.74 0.10

Class 4
0.887*** (0.138) 0.033* (0.019) -0.158*** (0.061) -0.677*** (0.082) -0.724*** (0.294) 0.007 (0.072) 201 11 12 0 0.21 0.06 0.80

Class 5
0.743*** (0.228) 0.018 (0.035) -0.208** (0.087) -0.728*** (0.105) -0.979*** (0.233) -0.080 (0.066) 38 11 12 0.05 0.84 0.25 0.61

0.348 (0.482) 0.140*** Grbal (0.052) -0.014 Colts (0.047) -0.491** Roi (0.185) -0.161 Rate1 (0.190) -0.027 Risk1 (0.077) 76 N 11 12 PK m1 (Pvalue) 0.38 m2 (Pvalue) 0.27 0.95 Sargan 0.32 Pvalue

0.255 (0.124) (0.066) (0.098) (0.133) (0.176) (0.583) 0.191*** 0.198*** 0.182*** 0.137*** 0.153*** Gturn 0.056*** (0.025) (0.009) (0.016) (0.033) (0.041) (0.020) 0.013 0.014 0.056*** -0.040 -0.087 -0.061 Colts (0.025) (0.011) (0.020) (0.055) (0.082) (0.061) -0.668*** -0.796*** -0.769*** -0.709*** -0.794*** Roi -0.346** (0.052) (0.032) (0.042) (0.086) (0.126) (0.173) -0.140*** -0.215*** -0.469*** -0.510** -0.516** Rate1 -0.485 (0.051) (0.031) (0.063) (0.246) (0.204) (0.368) 0.052 0.031 0.026 0.020 -0.095 -0.002 Risk1 (0.033) (0.023) (0.029) (0.073) (0.075) (0.081) 224 1,519 841 201 38 76 N 11 12 11 12 11 12 11 12 11 12 P K 11 12 0 0 0 0 0.02 m1 (Pvalue) 0.52 0.88 0.99 0.38 0.39 0.49 m2 (Pvalue) 0.38 0.22 1.04 2.24 0.01 0.53 0.75 Sargan 0.63 0.31 0.14 0.93 0.46 0.38 Pvalue

N firms, P parameters, K instruments, robust standard errors in parentheses. *: p = 0.1, **: p = 0.05, ***: p = 0.01. All models are estimated in first differences with time dummies, instruments are in levels. Model 1: GMM (second-step results), instruments: lagged endogenous t-3 and t-4, other explanatory variables exogenous.

7DEOH  FRQWLQXHG *HUPDQ\ Version 1 Crtot-1 Class 1 Class 2

0.462*** (0.082) 0.129*** (0.011) 0.122*** (0.027) -0.858*** (0.085) -0.601*** (0.107) -0.080 (0.089) 449 11 12 0 0.10 0.004 0.95

Class 3
0.446*** (0.065) 0.129*** (0.014) 0.112*** (0.031) -0.641*** (0.059) -0.768*** (0.099) 0.033 (0.053) 518 11 12 0 0.003 0.76 0.38

Class 4
0.890*** (0.142) 0.180*** (0.030) 0.000 (0.086) -0.313** (0.125) -1.105*** (0.202) 0.094 (0.084) 153 11 12 0 0.006 0.84 0.36

Class 5
1.204*** (0.238) 0.209*** (0.039) 0.151* (0.080) -0.024 (0.128) -0.674*** (0.177) 0.130 (0.100) 82 11 12 0 0.02 3.56 0.06

0.355** (0.178) 0.011*** Grbal (0.021) 0.110*** Colts (0.038) -0.647*** Roi (0.142) -0.409*** Rate1 (0.143) -0.121 Risk1 (0.170) 73 N 11 12 PK m1 (Pvalue) 0.05 m2 (Pvalue) 0.69 0.002 Sargan 0.96 Pvalue

Model 1 Version 2 Crtot-1

Class 1

Class 2
0.536*** (0.102) -0.027 (0.017) 0.054* (0.032) -0.829*** (0.085) -0.933*** (0.137) -0.053 (0.088) 449 11 12 0 0.99 0.04 0.85

Class 3
0.454*** (0.071) -0.010 (0.013) 0.029 (0.034) -0.607*** (0.065) -1.058*** (0.116) 0.014 (0.055) 518 11 12 0 0.001 0.13 0.72

Class 4
0.880*** (0.150) 0.042 (0.031) -0.192* (0.106) -0.341*** (0.122) -1.442*** (0.197) 0.112 (0.085) 153 11 12 0 0.002 0.54 0.46

Class 5
1.153*** (0.291) -0.036 (0.028) -0.003 (0.078) 0.108 (0.157) -0.835*** (0.220) 0.044 (0.106) 82 11 12 0 0.01 3.14 0.08

0.488** (0.213) 0.034 Gturn (0.022) 0.092** Colts (0.039) -0.748*** Roi (0.153) -0.816*** Rate1 (0.176) -0.223 Risk1 (0.185) 73 N 11 12 PK m1 (Pvalue) 0.03 m2 (Pvalue) 0.98 0.024 Sargan 0.88 Pvalue

N firms, P parameters, K instruments, robust standard errors in parentheses. *: p = 0.1, **: p = 0.05, ***: p = 0.01. All models are estimated in first differences with time dummies, instruments are in levels. Model 1: GMM (second-step results), instruments: lagged endogenous t-3 and t-4, other explanatory variables exogenous.

 6XPPDU\ DQG FRQFOXVLRQV

The survey of the empirical literature has shown that it is difficult to gain a clear picture of the determinants of the borrowing behaviour of French and German firms, and that there is a lack of cross-country studies. The aim of this chapter was to perform this task by harmonizing data and variables and assessing the robustness of our econometric results by estimating a dynamic model. The central question is whether our empirical analysis can provide a more precise idea of the borrowing behaviour of French and German firms. The answer is a cautious yes. First, analogous to other studies, the null hypothesis of "M-M" is rejected by detecting a few statistically significant explanatory variables. But additionally, we can show that it is difficult to find unique results with respect to all the determinants employed. Indeed, the estimates depend on several factors, such as samples, variables and econometric methods. In general, articles based on balance sheet data have to confine themselves to large or even listed enterprises. However, in our investigation small and medium-sized firms are included. And it can be shown that the behaviour of different size classes is not equivalent. Therefore, the results are necessarily sensitive to the samples used for estimation. The importance of a variabless definition can be seen when we use two different concepts of growth. The growth rate of total assets provides satisfactory and stable results, whereas the growth of turnover yields not very convincing coefficients. Another case we examine is the definition of collateral. A broad definition including stocks must be preferred to the narrow one covering tangibles only more often picked up by the literature. Furthermore, one has to pay attention to the fact that such variables often prove to be poor proxies of the explanatory variable to be measured. Finally, the choice of the econometric method seems to be of importance. For example, by neglecting the firm-specific heterogeneity, the usual OLS procedure produces divergent estimates from a fixed effects model. We demonstrate the necessity of a dynamic specification; when investigating the debt function, the static approach neglects the persistence of the debt ratio, which is an important element in describing enterprisess borrowing. The dynamic specification, together with the introduction of fixed effects, is one of the arguments for using more sophisticated methods, namely the generalized method of moments. Another aspect is the exogeneity assumption of the regressors. If we assume that the determinants of debt are exogenous, all the explanatory variables except the risk proxy prove to be significant. However, the relationships change dramatically for some - 187 -

variables when admitting total or partial endogeneity, allowing the risk proxy to be significant, to the detriment of collateral and sometimes cost of finance proxies. Our main results with respect to borrowing behaviour are summarized in 7DEOH  for the dynamic model estimated on total samples. We focus on the results with the growth of total assets variable, which, as already underlined, gives the most reliable estimates. First, in a way French and German firms show surprisingly parallel behaviour. Most of the variables are significant for both countries, with nearly the same signs, and the differences between the estimated models, according to the hypotheses one is ready to make, are very similar. In the dynamic model, where we assume exogeneity of all regressors, growth and collateral are positively correlated to enterprisess debt, the relationship between profit or cost of finance and leverage is negative, and finally the risk proxy is not significant. A similar parallel is reported by the comparative studies of Rajan and Zingales (1995) and Ramb (1998) even though the signs of the coefficients reported there are not identical to our findings. With respect to the theoretical background our estimations are - on the one hand - in favour of the signalling approach (growth, collateral) - on the other hand - in favour of the view of financial hierarchy or pecking order (profit), and support the traditional textbook interpretation that enterprisess credit demand is sensitive to its own price. If we assume measurement errors and endogeneity of all variables, then the results become less precise for France and Germany. Due to the problem of poor instruments, the lagged endogenous variable and the profit variable are left as the main determinants, and the risk variable becomes significant and positive for both countries. Insofar, profit in the context of pecking order seems to be the most stable outcome of our analysis. This is confirmed by other studies, too. However, for Germany, Schwiete and Weigand (1997) find a positive relationship between profit and debt, which would support the signalling approach. But one must not forget that the data set of these authors is based on public limited companies only. Finally, a mixed approach, instrumenting only a few of the regressors, on the basis of measurement errors and simultaneity bias, yields negative coefficients for the cost of finance variable and a positive coefficient for the risk variable. For these two variables, the short-run effect is stronger in Germany than in France. But this may be due to the different composition of the two samples, with the German one including larger firms. Therefore, the differences in the coefficientss magnitude should be commented on the borrowing behaviour estimated by size class.

- 188 -

In fact, size and time are the relevant variables where marked discrepancies in borrowing behaviour between the two countries occur. Descriptive statistics and variance analysis show that time is an important determinant for France, but not for Germany. This suggests that macroeconomic factors, namely the impact of tax policy and the end of the so-called "indebtedness economy" in France are also responsible for firmss debt behaviour. On the other hand, the size dimension seems to be a very important explanatory variable only for Germany. Small German firms depend more on external funds than large enterprises, which supports the cost-of-access theory for Germany. Needless to say, the availability of these external funds is ensured by the "Hausbank" system, as described in &KDSWHU . Our investigation provides some additional insights into borrowing behaviour by running the regressions by size class as well. Above all, including data for small and medium-sized firms is important because such firms represent the dominant part of the firm landscape. Furthermore, as already emphasized the behaviour of the various size classes is not identical in the two countries. The most interesting result may be the similar increase of the cost of finance impact (in both short-run and long-run perspective) when going from small firms to larger ones, i.e. in France and in Germany, larger firms seem to be more sensitive to cost of finance than small ones. This may reflect the fact that large firms have other alternatives, namely access to financial markets. To conclude, in spite of clear institutional differences between France and Germany, the borrowing behaviour is less divergent than one would presume at first glance. With respect to the explanatory variables growth, collateral, profit, cost of finance and risk, the relationships to enterprisess debt are relatively similar. However, significant differences can be found over time and by size. The second essential outcome is that a unique debt equation does not exist, as the estimates always depend on several factors. As mentioned above, we have tried to take some degrees of freedom into account, but a few questions are still open for further research. A first item is a more detailed analysis of alternative variables, above all including the influence of taxes on enterprisess debt. Additionally, more sophisticated GMM techniques, combining equations in levels and equations in differences could be tested to improve the precision of the estimates. Here we had to confine ourselves to balanced samples because of the short time period. In future, as more years can be added to the samples, unbalanced panels could be used. Under such circumstances, the implications of the survival and selection bias could be checked. Furthermore, a longer panel would enable us investigating short-run versus long-run debt relationships in more detail by estimating alternative dynamic specifications, such as the rational-lag model. Finally, when studying borrowing behaviour we concentrated on the analysis of total creditors. Investigating the different components of enterprisess debt and the crucial question of the component substitution should be a further interesting challenge.

- 189 -

7DEOH  6XPPDU\ RI HFRQRPHWULF UHVXOWV  '\QDPLF ERUURZLQJ EHKDYLRXU HVWLPDWHG LQ ILUVW GLIIHUHQFHV 
Version 1: Total assets growth Model 0 OLS ) * Growth ) * Collateral ) * Profit ) * Cost of finance ) * Measure of risk ) * Model 1 Model 2 Model 3 Model 4 Model 0 OLS Model 1 Version 2: Turnover growth Model 2 Model 3 Model 4

GMM GMM GMM GMM (exogenous) (endogenous) (endogenous) (smixeds) 0.85 0.55 0.19 0.14 0.02 0.12 -0.77 -0.68 -0.29 -0.72 >0 ns >0 ns 0.80 0.49 0.32 0.18 <0 ns >0 ns -0.81 -0.60 <0 ns <0 ns >0 ns 0.50 0.77 0.50 0.31 0.16 <0 ns >0 ns -0.82 -0.47 <0 ns <0 ns 0.25 0.69 0.87 0.55 0.20 0.14 0.10 >0 ns -0.72 -0.63 -0.30 -0.69 0.16 0.63

GMM GMM GMM GMM (exogenous) (endogenous) (endogenous) (smixeds) 0.87 0.59 0.06 -0.02 -0.06 0.04 -0.73 -0.65 -0.75 -1.05 >0 ns <0 ns 0.61 0.46 >0 ns >0 ns <0 ns >0 ns -0.23 -0.39 -0.28 >0 ns >0 ns 0.54 0.72 0.44 >0 ns 0.10 >0 ns >0 ns -0.36 -0.38 >0 ns >0 ns >0 ns 0.64 0.95 0.59 0.07 <0 ns 0.28 0.16 -0.64 -0.59 -0.87 -1.04 >0 ns 0.64

Debt (t-1)

0.28 0.07 0.14 0.10 0.02 0.11 -0.57 -0.62 -0.16 -0.42 >0 ns <0 ns

0.08 <0 ns 0.06 0.02 <0 ns 0.07 -0.50 -0.62 -0.40 -0.55 >0 ns <0 ns

Models 0 and 1: see 7DEOH . Models 2 and 3: see 7DEOH . Model 4: see 7DEOH . F: France - 2,899 firms, G: Germany - 1,275 firms. ns: Pvalue > 0.1.

 %LEOLRJUDSK\
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