Corporate Funding: Who Finances Externally? We document a surprising reliance on internal finance among eleven thousand U.S. public industrial companies over the past quarter-century

April 4, 2013 Leave a comment

Corporate Funding: Who Finances Externally?

B. Espen Eckbo Dartmouth College – Tuck School of Business; European Corporate Governance Institute (ECGI)

Michael Kisser Norwegian School of Economics

March 28, 2013
Tuck School of Business Working Paper No. 2012-110 

Abstract: 
We document a surprising reliance on internal finance among eleven thousand U.S. public industrial companies over the past quarter-century. Pooling all sources of cash, the median contribution from net debt issues (above debt repurchases) is zero for the period, and two percent for equity issues. Fifty-six percent of the firms issue positive net debt at most twice over the quarter-century. As predicted, low-frequency issuers exhibit significantly higher fixed direct issue costs than low-frequency issuers. After the IPO year, debt issues are overwhelmingly rollovers, supporting a relatively stable average leverage ratio. In an average year, firms raise twelve percent of total funds externally, but the top two hundred issuers receive eighty-four percent of the total net debt issue proceeds. We also discover that funding decisions differ significantly in response to positive and negative net operating cash flows. Negative operating cash flow triggering primarily equity issues. However, in years with positive operating cash flow, the correlation between debt issues and profitability is positive, which helps resolve a long-standing capital structure puzzle.

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