Surveys of Theory, Evidence and Policy
Edited by Christopher J. Green, Colin Kirkpatrick and Victor Murinde
Chapter 12: Company Financial Structure: A Survey and Implications for Developing Economies
12. Company ﬁnancial structure: a survey and implications for developing economies Sanjiva Prasad, Christopher J. Green and Victor Murinde 1. INTRODUCTION The ﬁnancial structure of a company arises from the ways in which it ﬁnances new investment. There are three main funding choices which are then reﬂected in a ﬁrm’s capital structure: employ retained earnings, borrow using debt instruments or issue new shares. These components of capital structure also reﬂect ﬁrm ownership in the sense that retentions and equity correspond to shareholder interests while borrowing gives rise to claims by debt holders. This is the broad pattern found in developing and developed countries alike (see La-Porta et al., 1999).1 Capital structure also affects corporate behaviour (Hutton and Kenc, 1998). Thus ﬁnancial structure is concerned with the closely-linked relationships among ﬁnancing policy, capital structure and ﬁrm ownership. The development of these relationships is a key factor in explaining how economic agents acquire and utilize assets through ﬁrms and capital markets, and create returns, whether in the form of direct remuneration, capital gains, debt interest or dividends. There is a large volume of research on company ﬁnancial structure in industrial countries, but virtually no work has been done on developing countries (LDCs), apart from a limited amount of empirical research pioneered particularly by Singh: for example, Hamid and Singh (1992), Singh (1995) and Brada and Singh (1999). It is scarcely an exaggeration to state that, until recently, corporate ﬁnance did not exist as an area of research for LDCs....
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