Structure of Corporate External Financing

D URING the postwar period through 1968, corporate extemal financing in the United States totaled $220 billion. In the late 1940's, this financing averaged $5 billion a year; since 1965, it has averaged over $22 billion a year. While the dollar amount has grown far faster than aggregate economic activity, the proportion which external financing has contributed to overall corporate financial requirements has fluctuated surprisingly little, averaging around 22 per cent for the whole period. Nevertheless, important shifts have occurred in the composition of external financing. This article endeavors to discover and explain the shifts in the relative importance of the chief forms of corporate external financing. Table I summarizes trends in the percentage distribution of the various types of external financing according to four five year periods: 1946-50, 1951-55, 1956-60, 196165 and, a final shorter period 196668. Table II shows the same percentage distributioln annually for each of the twenty-three years. The data shown is for all non-farm, nonfinancial business corporations and is taken from the Federal Reserve Board of Governors "Flow-ofFunds" statistics. Corporate financing in the mortgage market is not included because it is used only to finance corporate home construction. What is left, therefore, financed normal business investment and consisted of bank loans, commercial paper, new stock issues and new bond issues. The distribution during the first fifteen years of the postwar era (our first three periods) was substantially different from the last eight years. In the early period stock financing was important and bank financing declined. Commercial paper's rise was nominal until the late 1950's. Bond financing, however, was very stable at about one half of total requirements. As Table I shows, the distribution in the early 1960's was very different. In the first place there was a reduced role for total external financing which averaged only about 17 per cent of total sources, this compares with from 22 per cent to 24 per cent earlier. There was also a large increase in the relative importance of commercial bank financing and the use of paper financing continued to expand as it had in the late 1950's. The proportion of bond market financing, on the other hand, declined. But the most dramatic development was the shrinking of new equity financing to one third of its former importance. These changes reflected the steady bialanced growth of the economy during this period which, in turn, enhanced corporate cash flow, favored an expansionary monetary policy and put relatively little financing pressure on the bond or stock markets. The late 1960's differed substantially from the early 1960's. Demands grew at a far faster rate than resources. This is evident from the relatively smaller role of bank loans and the increased roles of paper and bond market financing. These trends reflect the greater monetary restraint and the revival of inflation. The sections below will deal in greater detail with several specific