corporate finance in france and germany

7/31/2019 Corporate Finance in France and Germany

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Corporate Finance in Germany and France

A Joint Research Project of the

Deutsche Bundesbank and the Banque de France

With contributions by

Hans Friderichs, Dieter Gerdesmeier,

Elizabeth Kremp, Bernard Paranque,

Annie Sauv, Manfred Scheuer

and Elmar Stss

edited by

Annie Sauv

and

Manfred Scheuer

September 1999

The contributions to this study represent the authors'personal opinions and do not necessarily reflect the viewsof the Deutsche Bundesbank and the Banque de France.


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Deutsche Bundesbank, Wilhelm-Epstein-Strasse 14, 60431 Frankfurt am Main,

P.O.B. 10 06 02, 60006 Frankfurt am Main, Federal Republic of Germany

Telephone 49 69 95 66-1

Telex within Germany 4 1 227, telex from abroad 4 14 431, fax 49 69 5 60 10 71

Banque de France, 31, rue Croix-des-Petits-Champs, 75001 Paris, France

Telephone 33 1 42 92 42 92, fax 33 1 42 92 42 92

Please address all orders in writing to:

Deutsche Bundesbank, Press and Public Relations Division, at the above address, or via

fax 49 69 95 66-30 77,

or to:

Banque de France, 07.1050 Service Relations avec le public 75049 Paris Cedex 01

Telephone 33 1 42 92 39 08, fax 33 1 42 92 39 40

Reproduction permitted only if source is stated.

ISBN 3-933747-23-6


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General introduction and summary 1

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CHAPTER 1

The issue of corporate finance: theoretical approaches and

previous empirical results

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1. Introduction 10

2. Traditional approaches to the issue of corporate finance 11

2.1. The neoclassical base theory and recent developments 11

2.2. Selected empirical studies on corporate finance: 14

lessons and limits

3. The institutionalist approach: corporate finance from

the perspective of organizational theory and the theory

of conventions 19

3.1. Organization and convention 20

3.1.1. The relationship between banks and companies 24

3.1.2. The conventions of insolvency law 25

4. Bibliography 27


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CHAPTER 2

The annual accounts databases on non-financial enterprises

of the Banque de France and the Deutsche Bundesbank:

methodological aspects and comparability

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1. Origins and special features of the databases of the

Banque de France and the Deutsche Bundesbank 34

1.1. Banque de France 34

1.1.1. The FIBEN database 34

1.1.1.1. The Turnover Rating 36

1.1.1.2. The Credit Rating 36

1.1.1.3. The Payment Rating 37

1.1.1.4. Management Rating 37

1.1.2. The CdB database 38

1.2. Deutsche Bundesbank 41

2. Construction of the samples 44

3. Differences in accounting regulations and related

adjustment procedures 50

3.1. Accounting discrepancies which have

been completely eliminated 51

3.1.1. The disclosure of debtors and creditors

according to the degree of economic

integration 51


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3.1.2. The format of the annual accounts

with respect to profit appropriation 52

3.1.3. The disclosure of special tax-based reserves 53

3.2. Avoidable accounting discrepancies 53

3.2.1. The differentiation of other debtors

and creditors 53

3.2.2. The disclosure of financial assets 54

3.3. Insoluble accounting discrepancies 55

3.3.1. Differences in the disclosure and

valuation of provisions 55

3.3.2. Revaluation of assets 56

3.3.3. Differences in the valuation of stocks 56

3.3.4. Differences in accounting for intangibles 57

3.3.5. The treatment of leasing 57

3.3.6. Accounting for grants and subsidies 58

4. Bibliography 62


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CHAPTER 3

Structures of corporate finance in Germany and France:

a comparative analysis for west German and French

incorporated enterprises with special reference to

institutional factors

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1. Introduction 64

2. Structures of corporate financing compared 65

2.1. The liabilities side 65

2.1.1. Structures and trends of own funds 67

2.1.2. Country-specific patterns of indebtedness 83

2.1.3. Cross-country differences in provisions 109

2.2. The assets side 115

2.2.1. Structures and trends of fixed assets 116

2.2.2. Differences in current assets 122

3. Conclusions from the descriptive analysis 128

4. Bibliography 134


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CHAPTER 4

Estimation of a debt function: evidence from

French and German firm panel data

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1. Introduction 140

2. Survey: theoretical and empirical literature 141

2.1. Explanatory variables of enterprisess debt 141

2.2. Econometric studies: overview 146

3. Description of the database and some descr iptive statistics 152

3.1. Data and definition of the variables 152

3.2. Unbalanced versus balanced panel 154

3.3. Trimming and balanced samples 156

3.4. Descriptive statistics by size categories 159

4. Standard panel analysis: static model 164

4.1. Analysis of variance 164

4.2. Static model: from OLS to within 166

4.3. Some initial results by size class 171

4.4. First differences: some answers to simple questions with

the static model 172


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5. Dynamic specification of the debt function 175

5.1. Estimation procedure 175

5.2. Exogenous specification of the dynamic borrowing behaviour 176

5.3. Dynamic debt function and endogenous regressors 179

5.4. A smixeds dynamic model 182

5.5. Dynamic estimation by size class 183

6. Summary and conclusions 187

7. Bibliography 191


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The present study is the outcome of a joint research project by staff members of the Banque

de France and the Deutsche Bundesbank. The members of the French team were

0LUHLOOH)HUKDQL(OL]DEHWK.UHPS%HUQDUG3DUDQTXHDQG$QQLH6DXYp, who was project

leader in this group. Those involved at the Bundesbank were +DQV)ULGHULFKV

'LHWHU*HUGHVPHLHU (OPDU6W|VV and 0DQIUHG6FKHXHU, who was project leader of the

German team. 0LUHLOOH )HUKDQL left the project at a very early stage, however, due to a

change in her field of work within the Banque de France, and 'LHWHU*HUGHVPHLHU took on

a new assignment within the staff of the European Central Bank in the autumn of 1998,

which meant that he was unable to continue his participation in this study.

The study is based on preliminary work by the European Committee of Central Balance

Sheet Data Offices, which was set up in 1985 to improve the analysis of corporate accounts

data through the exchange of information, the comparison of analytical methods, and the

carrying-out of joint studies. The Committee is currently made up of representatives of the

central banks or the statistical offices of 12 of the 15 EU member states (only Denmark,

Sweden and Luxembourg are not represented) and the European Commission. Over the

past 13 years, the Committee has performed a variety of tasks, one of them being the

creation of a joint harmonized database for the annual accounts statistics of non-financial

enterprises - Bank for the Accounts of Companies Harmonised (BACH) -, which ismanaged by DG II of the European Commission.

As part of the work of the European Committee of Central Balance Sheet Offices,

Germany, Austria, Spain, France, Italy and the DG II set up a working group in 1994 with

the task of comparing the financial situation of European enterprises. In 1997 the working

group presented an initial study entitled tNet Equity and Corporate Financing in Europet,

(Delbreil et al., 1997) which was especially devoted to intermediate economies in which

the capital markets play a much smaller role than in Anglo-Saxon countries. It set out to be

essentially descriptive, and its main objective was to provide a response to questions raised

by both theoreticians and practitioners in the financial sector:

Are there differences in levels of corporate net equity between countries?

Does net equity vary according to the size of the company, irrespective of the country?

Are small companies in a special financing situation in every country?


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The study was the fruit of initial research, but must be considered as the completion of a

first stage in a larger research project. The empirical basis of the study was provided by

individual data from the raw material of the national corporate balance sheet statistics,

which were presented in accordance with the methodological approach of the BACH

database. In addition, considerable efforts were made to ensure the comparability of the

data and, in particular, to neutralize the differences in accounting practice as far as

possible. The results obtained show that the capital structures in the European countries are

the outcome of many different factors, especially of diverging underlying institutional

conditions. Given that situation, the obvious thing to do was to confine further comparative

studies in this area initially to two countries since the differences in the systems of

financing - which obviously tend to be very large from country to country - can be analysed

and presented better in this way than in a multi-country analysis.

The principal aim of this project was to undertake a precise analysis of the respective

systems of corporate financing in France and Germany. An understanding of the specific

features of the financing systems in the various countries is of paramount importance for

monetary policy makers. In particular, after the implementation of the EMU the need for

more accurate information on how the ECBss decisions are transmitted to businesses in

each country is becoming increasingly important, because a knowledge of how the

transmission mechanism works in the different countries is of practical relevance for

preparing the single monetary policy in the Euro system. How private sector agents in thedifferent countries respond to the policy actions of the ECB and how the monetary

authorities and the private sector interact is often conditioned by specific institutional and

structural factors, in particular those determining the functioning of markets, the financial

behaviour of firms and of financial intermediaries and the composition of their balance

sheets (see, for example, BIS, 1995, and Deutsche Bundesbank, 1999).

A central concept for the assessment of the monetary transmission mechanism is that of the

functioning of the specific financial system, because it defines the channels, the factors and

the framework under which changes in the monetary policy instrument variables affect the

financing decisions of firms and, especially, the transmission of monetary policy actions to

the corporate sector by financial intermediaries acting as an interface between the policy

decisions of the central bank and the financing decisions of firms. Therefore, a

comprehensive understanding of the architecture and the operating mechanisms of the

different financial systems is a necessary prerequisite for monetary policy analysis.

However, the analysis of the transmission mechanism itself could for several reasons not

be conducted in the context of this study, but should be subject of further research projects.


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Other objectives of this cooperation were

to promote the exchange of information on corporate balance sheet analysis between the

two institutions,

to assess the usefulness of company data for the preparation of and the ensuing

implementation of monetary policy decisions in EMU, and

to set an example of intensive cooperation between central banks at the European level

within the European Committee of Central Balance Sheet Offices.

To set things in motion, the Banque de France and the Bundesbank decided to launch a

bilateral cooperation project in the field of corporate balance sheet analysis. The two

institutions, which started the project in January 1998, realized that their bilateral

cooperation should initially produce a pilot study and they would appreciate it if studies of

this kind could be extended to other member states.

At the end of November 1998, a joint Banque de France and Bundesbank workshop on the

research project tCorporate Finance in Germany and Francet was held at the Bundesbank.

The workshop was attended by interested members of both central banks, representatives

of the ECB and the EU, as well as a number of university professors with specialexperience in that particular field, namely Professor J.-P. Pollin (University of Orlans),

Professor P. Sevestre (University of Paris - Val de Marne) and Professor R. H. Schmidt

(University of Frankfurt). The participants in the workshop - in particular, the professors as

discussants - gave very helpful comments on a previous version of this study.1 Both teams

took up many of the ideas and suggestions for improvement and included them in the

study. Overall, this study represents a first step towards a comprehensive explanation of the

financing behaviour of enterprises in the countries of continental Europe in general and in

France and Germany in particular. In all the sub-sections of the study, in the theoretical

part, the descriptive analysis and the panel econometric study, a number of questions have

remained open. This is partly due to the fact that necessary additional studies would have

exceeded the length of time allocated for the project, which, from the outset, was limited.

1 We would therefore like to extend our thanks to all participants in the workshop, especially to the

professors, and to F. Ramb, Centre for European Economic Research, Mannheim. We are also grateful for

very helpful comments from M. Debonneuil, Commissariat Gnral du Plan, and D. Rivaud-Danset,Universit Paris 13. Furthermore, we thank M. Ferhani and the translation department of the Banque deFrance for their help. In addition, we are obliged to our colleagues M. Delbreil, M. Bardos (Banque deFrance), H. Herrmann, M. Scharnagl and H.-J. Hansen (Deutsche Bundesbank).


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Unlike earlier country comparisons in this area, the study is distinguished first of all by the

fact that it is based on very large sets of data. The tCentrale de Bilanst (CdB) base of the

Banque de France and the base material of the corporate balance sheet statistics of the

Bundesbank contain the balance sheet data of some 40,000 and 70,000 non-financial

enterprises per year, respectively, and samples were derived from these data for the study.

These are largely representative so that the databases - in contrast to the various approaches

in the literature - also contain a large number of small and medium-sized enterprises,

whose financing behaviour - as experience shows - differs very considerably from that of

large firms. Second, an attempt is made to eliminate, as far as possible, influences due to

differences in accounting practice. Furthermore, the descriptive analysis is supplemented

by a panel econometric study.

Since the Bundesbankss base material for eastern Germany was not nearly as extensive as it

was for western Germany, the study focuses on data from west German enterprises only.

Furthermore, as the CdB database almost exclusively covers incorporated firms, it was

necessary to restrict the analysis to enterprises having these legal forms for the sake of the

comparability of the results. For similar reasons, it seemed necessary to focus on individual

balance sheets of manufacturing corporations. This restriction was based primarily on the

considerations that this sector constitutes the core of industry in both countries and that it

tends to be more homogeneous with respect to its financing structures and customs than

other sectors of the economy, in which specific national financing conventions andpreferences obviously play a more important role. The analysis is mainly based on stock

figures of the balance sheet, owing to the fact that the available annual accounts of German

corporations do not provide a flow of funds statement.

Finally, the time period under review in the study is concentrated on the period 1987 to

1995 and 1996, respectively (only the Banque de France provides figures for 1996), in

order to completely cover the last business cycle, which occurred relatively synchronously

in both countries. It seemed especially appropriate to take 1987 as a starting point as this

was the year in which the Fourth EC Directive was translated into German accounting

legislation (five years later than in France). The minimum harmonization which this

achieved provided the necessary basis for the additional efforts made in this study to

eliminate most of the remaining accounting differences.

&KDSWHU of the study (authors: %HUQDUG 3DUDQTXH and +DQV )ULGHULFKV) gives a brief

overview of the theory of corporate finance and a summary of selected empirical studies in

this area in the recent literature. The main purpose of this chapter is to lay the foundation

for the empirical work. It begins with the Modigliani/Miller approach, which postulates

that all financial structures are neutral in terms of the cost of the various sources of finance,


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and shows the results of the ensuing controversy concerning the restrictive hypotheses of

the basic model, which can be summarized as concluding that capital structure actually

does matter. In addition to this, corporate finance is analysed from the point of view of

organizational theory and the theory of conventions, an approach which is not very well

known in Germany but quite popular in France, and which puts special emphasis on the

institutional determinants of corporate finance.

The subsequent discussion of several selected empirical studies on this issue gives the

impression that the results derived tend to be extremely contradictory, a fact that is mainly

due to a lack of comparability of the data sets used. This led both teams to the following

conclusions: the samples compared should be representative; the sample populations

should be homogeneous; the empirical approach should comprise not only liabilities but

also assets; and - last but not least - indicators should be harmonized. In order to overcome

some basic weaknesses of the studies analysed, considerable efforts were made in

&KDSWHU (written by +DQV)ULGHULFKV DQG $QQLH 6DXYp) to harmonize the data for both

countries as far as possible. It was necessary to develop a comprehensive harmonized

indicator concept which goes a step further than the adjustments taken in the BACH

database. Although such a harmonization approach will never be able to eliminate all the

existing accounting differences, it can undoubtedly be concluded that, in terms of its

representativeness and comparability, the dataset elaborated for this study is largely

superior to those investigated hitherto in the literature.

&KDSWHU (written by+DQV)ULGHULFKV, %HUQDUG3DUDQTXH, and $QQLH6DXYp) examines the

balance sheet structures of both French and German manufacturing firms and their

evolution during the last business cycle in the late eighties and early nineties. The first

section assesses the relative importance of the different financing sources used by the

incorporated enterprises in the two countries. The second section continues with a

description of the major differences in the asset structures. The final section summarizes

the conclusions derived from the findings with particular reference to the architecture and

functioning mechanisms of the corporate financing systems in Germany and France.

In general, the results derived in this chapter indicate that the differences in the systems of

corporate finance in France and Germany can be traced to a large extent to the institutional

context in the two countries. This defines particular rules and conditions under which

enterprises decide on their strategy to solve the capital structure puzzle and which tend to

differ greatly and systematically in the two countries. A very prominent factor is to be seen,

for example, in the relationship between banks and companies.


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The central question of &KDSWHU (written by (OL]DEHWK .UHPS (OPDU 6W|VV DQG 'LHWHU

*HUGHVPHLHU) is: What are the principal determinants of corporate leverage in Germany and

France when using a quantitative approach? To that end, well-known hypotheses derived

from traditional corporate finance theory are tested by applying panel econometrics to

identical debt equations of French and German firms. Various static and dynamic

specifications (including GMM techniques) are estimated for the complete (balanced) data

sets and sub-samples differentiated according to size classes. Underlying the full samples,

French and German firms show in some way a surprisingly parallel behaviour. In the

baseline model assuming exogeneity of the right-hand-side variables long-term growth and

collateral are positively correlated to debt supporting the theory of signalling. The negative

relationship of profit and leverage stands for the pecking order approach and finally the

impact of the cost of finance on enterprises s credit demand is negative, too. Nevertheless

clear differences in borrowing behaviour can be found with respect to the determinants size

and time. Time proxying macroeconomic factors are very important for France, but not for

Germany. On the other hand the variable size plays a major role for total creditors in

Germany only, where small firms depend much more on external funds than large

enterprises. Such a divergent lending outcome between French and German firms may be

based on the country-specific institutional settings. However, dependency of some results

on the econometric specification and the variabless definition underlines the difficulty to

present final answers. Additionally, it can be shown that the borrowing behaviour of firms

of different size classes is not equivalent. This result, which holds for both France andGermany, strengthens the fact that a representative firm and a unique debt equation does

not exist.

Frankfurt am Main Manfred Scheuer

Paris Annie Sauv

September 1999


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,QWURGXFWLRQ

Studies focusing on corporate finance,and more generally speaking on the financial deci-

sions of firms can be grouped into two broad categories according to their analytical point

of view:

The first category comprises research which analyses how financial structures are de-

termined by the relationships between shareholders and managers of companies. In

positing the hypothesis of a maximization of the value of the firm to its shareholders,

(Cobbaut, 1996), such studies focus on the choices made by managers and/or

shareholders between issuing shares and borrowing funds. The underlying frame of ref-

erence is that of neoclassical theory in which the main agent is the tsaver-investort. Seen

from this perspective, the firm is a nexus of contracts stemming from an imbalance of

power in situations in which the symmetry of information is imperfect and a divergence

arises between the respective interests of the shareholders and the managers (Harris and

Raviv, 1991). It seems that such approaches are more suited to describing the

relationship between investors and managers of large firms than to highlighting the

differences in financial behaviour of all enterprises, whether listed or unlisted.

The second category is research on the financing methods adopted by companies with

regard to the nature of their assets and the degree of uncertainty under which agentsmanage their activities - the uncertainty which confronts economic agents not only with

respect to future conditions in the real world, but also as far as the future behaviour of

agents is concerned (Rivaud-Danset, 1996). The work of Coase (1987) and Williamson

(1988) can be subsumed under this category, along with that of Salais and Storper

(1993). This category seems to be applicable more to the financing decisions of SMEs,

which are characterised by a greater dispersion of economic situations and a more re-

stricted access to financial markets, than to those of large firms. From such a perspective

debt and equity seem to imply an alternative governance structure, depending on the na-

ture of the firmss assets and financial needs.

To conclude on this, it should be remembered that the influence (or lack of it) of financing

methods on the value of the company or on its economic activity will depend on its

financing requirements. On this point, if we follow Schumpeter (1935), quoted by Goux

(1995), tthe reigning (neoclassical) theory concords with our own view; like us, the theory

finds nothing of essential importance for the understanding of credit in routine finance

relating to goods (...). We can for this reason eliminate such operating credit from our study

(...)t. At the opposite end of the spectrum, a more traditional approach regards the

financing of corporate operations as having a determining importance. For example, in


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specific advantages of an approach taking into consideration an environment in which

revenue is uncertain, they showed that all financial structures that mix capital and debt are

neutral in terms of the cost of the various different sources of finance, that is to say the

YDOXH RI WKH ILUP. The work of Modigliani and Miller started a controversy on the

restrictive hypotheses of the basic model (taxation, agency costs, asymmetric information)

which led to a confirmation, by Myers and Majluf in 1984, of the idea that, contrary to

general belief, capital raised by calling for funds from the market is more costly than that

obtained from internal sources. In addition, the ULVNRIEDQNUXSWF\, the probability of which

increases with the size of the debt burden and the costs generated by controlling it, limits

any tendency to incur excessive levels of debt (Warner, 1977). Notably, it encourages

shareholders to demand higher rates of return.

Akerlof (1970) and Spence (1974) are described in the literature as the pioneers of the

method based on the VLJQDOOLQJ DSSURDFK. It was not until the latter half of the 1970s

(Ross, 1977) that the signalling approach was applied to the theory of corporate finance.

According to Leland and Pyle (1977), DFRPSDQ\FDQVHQGRXWVLJQDOV about itself in the

percentage of share capital held by its shareholder-manager: this testifies to the reliability

of its investment projects. In the Rosss model, the signal is the type of financing structure

chosen by the managers of the company. The value of a company increases with financial

debt. Since the managers wish to avoid bankruptcy, that is to say, they wish to maximize

their share in the profit, the level of financial debt can be seen as a signal of good corporatemanagement and, by extension, of good corporate performance.

Initially, Myers (1977) was interested in the phenomenon of debt in which both risk and

informational symmetry exist (debt overhang effect), that is to say in a situation in which

nobody possesses privileged information (Hyafil, 1991). He shows that the presence of

risky debt is enough to prevent issuance of shares to finance good projects. The existence

of a hierarchy of sources of finance (pecking order theory) was set out by Myers and Majluf

(1984) after Myers had laid down its broad lines. The situation may change if informational

asymmetry exists: internal funds are preferable to debt, and debt is preferable to equity.

$V\PPHWU\ RI LQIRUPDWLRQ means that the economic agents are not all equally well in-

formed. Because of their position, corporate managers have inside information about the

firmss situation and its prospects for economic and financial development. This asymmetry

explains why, in certain circumstances, recourse to contracted debt may be the preferred

course of action. As far as the company and its lenders of finance are concerned, three

categories of informational asymmetry can be defined1:

1 For a review of the literature on informational asymmetries, see Goyer (1995).


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Asymmetries of information appear before the signing of a loan agreement insofar as it

is difficult for the lenders to discriminate effectively between different requests for

project finance. Such informational asymmetry, which could be termed H[ DQWH

asymmetry, is the source of the phenomenon of adverse selection in the credit market

(Stiglitz and Weiss, 1981). For this reason, interest rates are not a good mechanism for

regulating this market. An increase in rates may lead borrowers offering the lowest

levels of risk to leave the market, only the highest risks remain.

Asymmetries of information also appear during the term of the contract. The borrower

may choose, from among his projects for investment, one with higher risk than the

project actually submitted to the lender on the basis of which the latter extended the

loan. If the lender looks only at the revenue generated by the borrower, he has no

knowledge of the exact nature of the project actually undertaken. He must determine

whether, for example, a reduction in revenue is the result of poor corporate management

or a normal reaction on the part of the company to cyclical variations in its environment.

Such agency problems relate to what has been termed PRUDOKD]DUG.

Finally, asymmetries of information may become apparent H[SRVW. The lender is unable

in this case to evaluate the precise rate of return on the project completed by the bor-

rower, who may have an incentive, in order to minimise his repayments, to declare a

lower amount of revenue than that actually earned (Williamson, 1986); this is calledRSSRUWXQLVP.

All these asymmetries generate DJHQF\ SUREOHPV and therefore monitoring costs. The

creditor perceives a risk of sub-optimal investment policy which may mean that the firm is

capable only of a level of repayment that is lower than its financial liability. Such a risk

will stem either from a strategy of under-investment (Myers, 1977), due notably to

withdrawals of benefits in kind by the entrepreneur, to the detriment of the company, or

from a strategy of over-investment reflecting excessive risk-taking on the part of the

borrower, who is thus transferring wealth from the creditors to the shareholders (Jensen

and Meckling, 1976). The problem of disincentive to invest optimally is assumed in the lit-

erature of economics to be particularly critical in companies with major opportunities for

growth, which may either initiate over-risky projects or pass up possibilities for growth.

The asymmetry of information can explain a specific organization of the relationship

between lenders and borrowers designed to reduce the costs of obtaining information, as

will be described later.


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derived show that the capital structure of the companies under review is far from being

identical in the various countries under consideration, whatever central indicator is used.

The main conclusion to be drawn from an examination of different ratios calculated is that

the ranking of countries according to indebtedness differs greatly depending on whether the

median or the mean ratio is used. The most impressive example is Germany, where the

median shows a very low own funds ratio, while the weighted mean points to a very high

level of capital. These differences between the median and the weighted mean demonstrate

that the weighted mean displays the aggregate situation of industry in each country by sum-

ming all companies to obtain a single balance sheet (as if they all formed just one large

corporation). This ratio is substantially dominated by the situation of big businesses, which,

owing to their large weight, have a significant influence on the result. Unlike the weighted

mean, the median expresses a value central to the distribution of the data without such an

offset. Each company has the same weight, and, for this reason, the median value is

affected by the firms which are most numerous - i. e. the smallest. The impact of large

corporations on the weighted mean is particularly noticeable in Germany, where the overall

figures primarily reflect the behaviour of the very big companies. This problem shows that

it would be more appropriate to use median figures for international comparisons if the

main focus of the study is to analyse the typical behaviour of firms.

Corbett and Jenkinson (1996) demonstrate, using aggregate corporate data and flow

indicators, that over the period 1970-1989 the average indebtedness to banks was percep-tibly lower in Germany than in Japan, the United States or the United Kingdom. However,

they identify two periods, 1975-1979 and 1985-1989, during which this source of funds

was below the general mean, especially in the US and in Germany, an observation which

seems to point to an increased use of internal resources. In addition, Deming-Kunt and

Maksimovic (1996) show that, whatever the country considered, short-term financial

requirements, such as for customers and stocks, correlate positively with financial debt,

particularly over the short-term, something which could be interpreted as an indication of

the firmss efforts to manage financial flexibility.

To sum up, the following conclusions can be drawn from the empirical studies previously

reviewed:

7KHVDPSOHVFRPSDUHGVKRXOGEHUHSUHVHQWDWLYH

As has been demonstrated by the overview of the empirical capital structure com-

parisons, the results seem to be extremely contradictory. Studies based on specific

samples of quoted business corporations find that German companies are invariably in a

favourable financial situation, with very low debt. By contrast, studies based on broad,


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representative samples conclude that French companies have the highest capitalisation

and the lowest debt ratio in Europe. Additionally, in the case of Italy the situation is

sometimes assumed to be similar to that of French companies or, quite the reverse,

Italian companiess financial autonomy is judged to be the lowest of all the countries

considered. In general, listed companies alone are not representative of the industrial

sector of an economy. They represent only a minority of companies in that sector, pos-

sessing special favourable conditions due to their access to financial markets. Further-

more, only large samples not limited to very large listed corporations can allow an

analysis of the size effect on financial debt.

7KHVDPSOHSRSXODWLRQVVKRXOGEHKRPRJHQHRXV

Comparisons have been established, for example, using samples covering companies

with different legal forms or with highly specific financial structures (partnerships and

sole proprietorships as opposed to incorporated businesses). Moreover, the method used

to process the data (aggregation or extrapolation) is sometimes completely divergent,

which likewise substantially influences the results.

7KHHPSLULFDODSSURDFKVKRXOGEHPRUHFRPSUHKHQVLYH

The research concept of some studies remains rudimentary. In reducing the analysis of

the financial structures of companies to the liabilities side alone without taking account

of the structure of their assets, such studies ignore differences in borrowing require-

ments and the related asset-specific patterns of corporate finance.

7KHLQGLFDWRUVXVHGVKRXOGEHKDUPRQL]HG

Assessing and ensuring the comparability of the indicators used is a necessary precon-

dition for reliable research results. This lack of homogeneity with respect to the indica-

tors used distorts the results of many international studies. In such cases no clear conclu-

sions can be drawn from the results as they are massively affected by differences in na-

tional accounting methods and in the structure and organization of national production

systems.

Bearing in mind the considerable difficulties caused by these methodological and sta-

tistical problems, great attention has to be devoted to these issues so as to ensure the

comparability and significance of the results. For the joint study of the Banque de

France and the Bundesbank it was especially important to find an adequate solution to

the outstanding methodological problems, an issue which is described comprehensively

in&KDSWHU

.


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7DEOH6HOHFWHGFRPSDUDWLYHUHVHDUFKUHVXOWVRQFRUSRUDWHILQDQFHVWXGLHVVLQFH

Title Databases and countries Indicators Period, scope and size Main results

Borio, C. E. V. (1990): Financial debt

and financing of non-financial

companies: an international

perspective

OECD financial statistics and na-tional fund flow statistics.

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

a) Debt (gross)/total assets;

b) Debt (net)/real assets.

1970-1987;

All industrial or commercialcompanies and manufacturing

industry; Representative national sam-

ples.

According to indicator (a) finan-cial debt higher in France than inGermany; according to (b) the

reverse is true and Italy similarto Germany.

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

BACH (old version) and GlobalVantage Data;

France, Germany, Japan, UnitedKingdom, United States (Italy,Netherlands, Australia).

Debt/assets. 1982-1987 and 1983, 1987;

All companies;

Representative nationalsamples and limitation ofcorporations listed on thestock market to a small num-ber: between 16 companies(France) and 31 (Germany).

Financial debt higher in Francethan in Germany and Italy; Italymore leveraged than Germany.

Global Vantage results data con-firm this observation but showgreater differences betweenFrance and Germany.

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

BACH (old version);

France, Germany and Belgium.

a) Net equity (+provi-sions)/balance sheettotal;

b) Net equity (+provi-sions)/fixed assets

(historical costs and mar-ket value).

1985-1991;

Manufacturing industry;

Representative national sam-ples.

If provisions are included in netequity, France shows higherfinancial debt than Germany,otherwise, financial debt higherin Germany.

Deutsche Bundesbank (1994):Comparison of the provision ofbusiness enterprises in selected ECcountries with own funds

BACH (old version)

and national sources;

Germany, France, Spain, Italy.

Net equity/balance sheettotal.

1982-1991;

Manufacturing industry;

National samples.

If no correction is applied formethodological differences be-tween samples and for data proc-essing, German firms are less fi-nancially autonomous than thosein other countries; after correc-tion, situation similar.

Rajan, R.G./Zingales, L. (1995):What do we know about capitalstructure? Some evidence frominternational data

Global Vantage Data;

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

a) Debt+provisions/totalassets;

b) Debt/total assets;

c) Debt/total net assets;

d) Debt/debt+net equity

(median and mean val-ues)

(historical costs and mar-ket value).

1987-1990;

All companies;

Limitation to corporationsquoted on the stock market,ranging from 118 companies(Italy) to 225 (France).

According to (a) financial debthighest in Germany (historicalcosts), and Italy and France verysimilar; according to (b) (c) and(d), Italy more leveraged thanFrance and Germany less thanFrance (positive correlation be-tween size and financial debtwith the exception of Germany).

Kneeshaw, J.T. (1995): A survey ofnon-financial sector balance sheets inindustrialised countries

National sources: INSEE forFrance, Statistisches Bundesamt forGermany, OECD and Banca d'Italiafor Italy, OECD and Banco deEspaa for Spain;

Australia, Belgium, Canada,France, Germany, Italy, Japan,Netherlands, Spain, Sweden, Swit-zerland, United Kingdom, UnitedStates.

a) Financial debt/total as-sets;

b) Financial debt+provi-sions/GDP;

c) Financial debt/GDP;

d) Net equity/GDP,

(market value).

1992;

All non-financial companies;

National samples and macro-economic data.

According to (a) financial debthigher in Germany than inFrance; according to the other in-dicators Italy has the least finan-cial debt and Germany the most;financial autonomy greatest inFrance.

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

Balance Sheet Office;

Germany, Austria, Spain, France,Italy.

Net equity/financial re-sources.

1990-1993 (checked for1995);

Manufacturing industry.

Least financial debt in Franceand Spain;

Germany more leveraged onmedian values, less on aggre-gate data;

Austria ranked between thesepositions;

Least favourable position in It-aly.

Corbett, J./Jenkinson, T. (1996): Thefinancing of industry, 1970-1989: aninternational comparison

Aggregate corporate data proc-essed on the basis of the nationalaccounting standards in each coun-try;

Germany, Japan, United States,United Kingdom.

Net resource flows. 1970-1989. More use of internal finance inUSA, UK and from 1985 to1989, Germany;

More use of equity issues inthe United Kingdom andUnited States;

Bank debt higher in Japan,lower in Germany.

Nayman, L. (1996): Les structures definancement des entreprises enEurope

OECD and BACH;

Germany, France, Italy and theUnited Kingdom.

a) Credit/GDP;

b) Balance sheet structure;

c) Profitability;

d) Resource percentage.

1987-1993;

Non-financial companies.

In 1994, credit/GDP higher inGermany and Italy, lower inFrance, very low in UnitedKingdom;

1987-1992, long-term debthigher in Germany, lower inItaly, UK; short-term debthigher in UK, lower in France.


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7KHLQVWLWXWLRQDOLVWDSSURDFKFRUSRUDWHILQDQFHIURPWKHSHUVSHFWLYH

RIRUJDQL]DWLRQDOWKHRU\DQGWKHWKHRU\RIFRQYHQWLRQV3

In the abundant neoclassical literature devoted to corporate finance the work of Myers and

Majluf (1984) is worthy of special attention owing to their concern to explain the high level

of corporate self-financing. Capital structure can be interpreted in terms of a hierarchy of

preferences (SHFNLQJRUGHUDSSURDFK) in the activation of sources of finance; the choices of

financing method influencing investment decisions can be seen as rational if we allow that

the managers of the company are seeking to maximize the value of the equity of the

existing shareholders (FRUSRUDWHZHDOWK). According to this interpretation, managers prefer

internal resources and call on external finance (with borrowing having priority) largely to

finance unexpected investment opportunities. Observed capital structure is contingent since

it is the result of need, which is unforeseeable, and the actual possibility of obtaining

finance for projects requiring outside resources (borrowing, equity offerings). The regulari-

ties observed cannot be interpreted by reference to any objective of maximising corporate

wealth (either for existing or potential shareholders). For Myers (1977, 1984), capital

structure is not a goal in itself and its make-up is the reflection of the past history of the

companyss borrowing requirements.

Rivaud-Danset et al. (1998) using the BACH database show not one but several preferredpatterns of financing: tA high level of profitability can be achieved by firms whose

financial patterns are distinct. A high level of own funds does not entail automatically

better performances and a higher gross profitabilityt. Then they point out the economic

flexibility of SMEs, which depends on their financial flexibility (Hicks, 1975). Its source

comes from internal liquidity and/or assured borrowing access.

The SHFNLQJ RUGHU DSSURDFK can be reinterpreted in this way, like a bridge between the

neoclassical approach and recent institutionalist concepts of explaining the financing

decisions of firms: to examine the organization of a firm as the process through which the

firm finds (tries to find) the best compromise between its needs of economic flexibility

depending on its possibilities of financial flexibility. Its governance structure is related to

the nature of its assets (and in turn depends on the relationship with other non-financial

firms) and its way of managing financial flexibility (and therefore also to its relationship

with borrowers).

3 This section is based in large measure on earlier work or studies currently under way, notably inconjunction with Rivaud-Danset and Salais (1996) under the research contract between the Banque de

France and the CNRS "Institution et Dynamique Historique de lconomie" IDHE - ENS Cachan researchteam.


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2UJDQL]DWLRQDQGFRQYHQWLRQ

Numerous contemporary proponents of the theory of the firm, notably the evolutionary

economists (Dosi et al., 1990), have highlighted the importance of organizational and/or

technological routines and expertise acquired by a firm through a process of internal

learning (tOHDUQLQJE\GRLQJDQGE\XVLQJt)4. These firm-specific resources, built up over

time, are often tacit and idiosyncratic, and therefore non-transferable (non-re-employable)

outside the company; they are also non-quantifiable in any direct manner since they do not

originate in any clearly identifiable expenditure. Evolutionary analysts, preoccupied by

selection, consider that the competitive strength and the viability of a company are

dependent on its tcore competencet and its relationships with customers and suppliers.

tCore competencet is defined as ta set of differentiated technological skills, complemen-

tary assets and routines forming the basis of the competitive capabilities of the company in

any specific type of activityt (Dosi et al., 1990). Maintenance of such competence

presupposes a certain degree of stability of working relationships over time, which limits

the use of adjustments to the workforce to adapt to variations in the level of activity, and

therefore it is reflected in a high degree of sensitivity of apparent labour productivity to

such variations. It is also possible to consider these resources as not being subject to the

same valuation requirements as physical or intangible investments stated in the balance

sheet. One might therefore assume that a company well equipped with such specialist

resources will be more capable of standing up to major variations in profitability, providedit tends towards a mean level of profitability over a period of several years.

In using the adjective tspecialistt for these resources, we are deliberately seeking to make a

distinction between such resources, on the one hand, and assets dedicated to special re-

quirements, and which are therefore tspecifict in the meaning used by Williamson (1975,

1985, 1986), on the other. According to Williamson, tangible and intangible investments

dedicated to specific purchasers in a context in which economic players can be presumed to

be opportunistic generate a specific risk for the company making such investments. This

risk stems from uncertainty as to the future behaviour of the purchaser. The value of the

assets concerned will depend on the future evolution of the relationship between the

supplying company and its customer. Specific assets play a central role in Williamsonss

theory of the firm. For him, shares and debt are less financing instruments underlying

specific contracts between players than a vehicle for managing the assets structure

(tUHJDUGLQJ GHEW DQG HTXLW\ DV DOWHUQDWLYH JRYHUQDQFH VWUXFWXUHV UDWKHU WKDQ PHUHO\

ILQDQFLDOLQVWUXPHQWVt). Recourse to contracted debt increases as the company uses assets

which are more standardised and less specific. From this point of view, the financing of a

4 The volume by Coriat and Weinstein (1995) presents an overview of the theory of the firm constructed by

evolutionist authors.


31/204


32/204

- 22 -

be established between the company and its financial context, will differ according to

whether or not the uncertainty can be dealt with in terms of a risk which can be covered.

Capital structure becomes a standard agreed by the parties and accepted by all players in-

volved. The latter also agree on a level of solvency at the end of the period (when the loan

is to be repaid), corresponding to H[ DQWH business profitability (Fayolle and Fleurbaey,

1990): it is this anticipated profitability which guides financing strategies. Financial debt

standards are neither independent of those for profitability nor constant. They change over

time and from place to place, they are sensitive to quantity-based credit rationing and to

interest rates, as well as to the treal economyt. Within any national system of financing, a

congruence is established between monetary regime, financing methods and type of

specialisation. For example, in France in the 1970s, the low mark-up ratios of companies,

due not only to the pay bargaining process but also to the limited possibilities for adding

value to products, was associated with a financial policy aimed at increased debt and a

monetary policy aimed at low real interest rates (Chanel-Reynaud, 1995). The strong franc

policy helped to change all these features by accentuating the shift of specialisation in

French industry towards high value-added products, in other words, towards products with

high mark-up ratios.

The diversity (as opposed to homogeneity) of capital structure may be dealt with by starting

out from the hypothesis on which financial conventions are based, i. e. that a companyss

borrowing requirements have every reason to vary in form, time horizons and intensity as a

feature of its organizational model and its product (Rivaud-Danset and Salais, 1992).

However, certain forces tend to promote a homogenisation of capital structure:

The greater or lesser variety of financing conventions depends not only on the diversity

of products but also on the way in which lenders of funds build up and process

information, on the availability to them of tools for the analysis of risk and for the

measurement of variation in levels of performance of individual products.

Financial debt can then be analysed as a standard related to rates of return H[ DQWH

(financial debt capacity) and H[SRVW(actual self-financing capacity). However, the rate

of return is not an indicator of the hierarchical ranking of product models;

organizational and product models are profitable if they are implemented in a consistent

manner (Salais and Storper, 1993; Rivaud-Danset and Salais, 1992; Paranque et al.,

1996).


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According to the focal points associated with financing conventions discussed above,

capital structure is likely to have an effect on the activity of non-financial companies,

generally centred on the financing of investment, shifts to embrace cash in hand or the need

for extra liquidity to finance short-term fluctuations in circulating capital and the desire for

flexibility, as defined by the ability to adapt to unforeseen events (Rivaud-Danset and

Salais, 1992). The resulting mix of different sources of finance reflects the need for

financial flexibility imposed by the companyss commercial outlets and organizational

patterns. This flexibility may be considered to be analogous to that needed in the

management of the workforce and operating cycles. This distinction between types of re-

sources is that proposed by Hicks (1975) between DXWRHFRQRP\ and RYHUGUDIW. According

to this author, an implicit or explicit guarantee of access to current credit may provide

companies in overdraft with flexibility equivalent to that conferred by the holding of finan-

cial assets in the case of companies within auto-economy (Hicks, 1975). Firms may find

themselves in one or another of these situations, but they may also choose from among the

different financing sources a principal source or a combination of sources which best meets

their needs for financial flexibility. More specifically, the financial structure of a company

is shaped by the way in which it manages such needs and, particularly, by its capacity to

obtain guaranteed access to credit, and thereby its greater or lesser exposure to the risk of

credit rationing and/or variations in rates. The hypothesis which posits the structure of

corporate financing as being dependent on financial determinants (resources available to

the company, access to substitute sources of funds, cost etc.) and, possibly, also on realdeterminants, is thus open to testing. To be more precise, a proposition is posited whereby

these real determinants are not limited to opportunities for investment and include

characteristics of the company which are defined by reference to the nature of the

predominant uncertainty and the reason for seeking finance (fixed versus circulating

capital). They therefore lead to a focus on problems of co-ordination between economic

players.

More generally speaking, the firm is an institution because laws and rules organize its

activities and the co-ordination between inside players. But the firm also works with other

institutions and within other institutions. In this way, its behaviour depends on the goals

and, in turn, the organization of those institutions (Salais and Storper, 1993; Salais, 1994).

The market is a mechanism which probably allows this co-ordination, but in many cases it

is not sufficient, since prices are not fully efficient as a central coordination instrument.

Under such conditions, conventions like solvency law or commitment relationships are

necessary in order to overcome the initially existing uncertainty: the agents need co-

ordination to reduce uncertainty in order to be able to plan their decisions. To sum up, ac-

cording to the theory of conventions, companies will differ systematically in their financial

structures not only as far as cross-country comparisons are concerned but also within the


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national context according to their financing requirements, in particular the different needs

for financial flexibility, which for their part heavily depend on the nature of their products.

But even more important is the fact that the differences in the financial structures of

enterprises can be understood only by taking into account the different financing

conventions as the principal co-ordination mechanism between the company and its

business partners: as far as banking intermediation is concerned, these are the rules which

dominate the relationship between banks and their corporate customers, but also the legal

context, especially insolvency law, which shape the relationship between creditors and

their respective debtors. Thus the theory of conventions develops a new framework for

financial analysis: financial structures are the complex result of an interaction between the

nature of the firm and its products, especially the industrial organization, the product-

market and the quality etc., and its financing partners as well as the specific institutional

factors that provide the framework for individual action. Therefore, it is essential to un-

derstand the basic constitutional principles of each national corporate finance system in

order to explain the existing cross-country divergencies in capital structures.

7KHUHODWLRQVKLSEHWZHHQEDQNVDQGFRPSDQLHV

As Davis (1995) emphasizes, the relationship between banks and companies constitutes a

specific means of reducing credit risk. From this point of view, we may follow Rivaud-

Danset and Salais (1993) in defining two types of relationship according to the nature ofthe commitments of each party: procedure-based banking and commitment-based banking.

However, according to Davis (1995), who refers to von Thadden (1992), an excessively

close relationship between the bank and the company may overly encourage short-term

investment. This prompts the question of what is the causal direction in this context: could

it be, as far as commitment-based banking is concerned, the need for financial flexibility,

and hence the need for liquidity, that gives firms without liquid financial assets an

incentive to enter into such a close relationship with the bank?

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35/204

- 25 -

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ILQG RXW ZKDW WKH ERUURZHUV QHHGV DUH 7KLV GLDORJXH DOORZV WKH EDQN WR JDLQ DFFHVV WR

LQIRUPDWLRQFRQVLGHUHGWREH FRQILGHQWLDO3HUVRQDOLVHGDQG WKHUHIRUHGLYHUVHSURFHGXUHV DUH

LQYROYHGIRUWKHDFTXLVLWLRQDQGSURFHVVLQJRILQIRUPDWLRQ7KHTXDQWLW\RIGDWDSURYLGHGLVOHVV

LPSRUWDQWWKDQWKHFDSDFLW\IRUSURFHVVLQJLWVSHFLDOLVHGH[SHUWLVHQHFHVVDULO\DFTXLUHGRYHU

WLPHDQGWKHHVWDEOLVKPHQWRIDQLQGLYLGXDOLVHGUHODWLRQVKLSDOORIZKLFKHQDEOHWKHEDQNWR

JHWWRNQRZLWVFXVWRPHU,QWKHRWKHUGLUHFWLRQWKHH[SHUWFDSDELOLW\DFTXLUHGE\WKHEDQNDQG

WKHEXLOGLQJRIDFORVHUHODWLRQVKLSJXDUDQWHHWKHFRPSDQ\DTXDOLW\RILQIRUPDWLRQZKLFKLWZRXOGRWKHUZLVHKDYHGLIILFXOW\LQDFTXLULQJt(Rivaud-Danset and Salais, 1992)

7KHFRQYHQWLRQVRILQVROYHQF\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 pro-

debtor related systems (Wood, 1995). Pro-creditor related systems are systematically

oriented towards the protection of creditors resulting from a debtor default. This kind of

proceedings is primarily concentrated on the liquidation of the debtorss assets and the

distribution of the proceeds realized to the creditors involved. Therefore, these insolvency

regulations are currently classified as liquidation procedures. In contrast to that, pro-debtor

related systems intend to save defaulters and their employees from the viewpoint that the

creditors, too, have to contribute to this rescue. That kind of proceedings is commonly

called a restructuring or rehabilitation insolvency procedure, as the maintenance of

economic activity, with the goal of finally rehabilitating the ailing enterprise and

safeguarding the jobs at risk, has priority over the detrimental effect on creditor rights. The


36/204

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degree of protection granted to creditorss rights constitutes another important criterion for

ranking insolvency proceedings into pro-debtor and pro-creditor related systems. The goal

of maintaining the activity of the bankrupt firm within a restructuring insolvency procedure

makes it necessary to shield the enterprise that is experiencing difficulties from the legal

measures of its creditors in order to prevent an early destruction of the insolventss estate.

Imposing a freeze on the enforcement of secured debt or a debt moratorium, which amount

to a certain temporary destruction of creditors s rights, are the logical consequence of such

an approach. Furthermore, as bankruptcy systems in general have to establish a ladder of

payment, the systems differ systematically with respect to deciding who are the super-

priority or priority creditors who are largely outside the bankruptcy procedure and are paid

in full. Major differences have to be recognised concerning the secured creditorss position

in relation to competing interests. In pro-creditor related systems, secured creditors have

absolute priority over all other categories of existing claims, while in pro-debtor related

systems the insolvency administrator can often raise super-priority moratorium loans to

finance the rehabilitation but which downgrade existing security. In addition, employees s

salaries, bankruptcy administration costs and taxes often enjoy preferential treatment

before secured debt is paid. As this regime favours a special class of unsecured creditors, it

devalues the purposes of security in enterprise financing: security is designed to be a fair

exchange for the credit, it protects against insolvency losses, as it allows the payer the right

to the asset. It appears evident that pro-creditor related systems, in which the secured

creditor rights are fully respected and prioritised, encourage excessive bank financing ofenterprises as the probable insolvency losses of banks are minimised. Under such

conditions it may be expected that own funds lose much of their function as credit

guarantees, as in cases of financial distress securities provide a safer cover for loans than

own funds do owing to the insolvency-proofness of collateral. Therefore, cross-country

differences in the level of capitalisation and leverage of companies tend to depend directly

on the legal conventions concerning the degree of protection of creditors s rights provided

by the national insolvency procedures.


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%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

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&+$37(5

7KHDQQXDODFFRXQWVGDWDEDVHVRQQRQILQDQFLDOHQWHUSULVHVRI

WKH%DQTXHGH)UDQFHDQGWKH'HXWVFKH%XQGHVEDQNPHWKRGRORJLFDO

DVSHFWVDQGFRPSDUDELOLW\

E\+DQV)ULGHULFKVDQG$QQLH6DXYp


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The tBanque de France ratingt comprises three elements:

a turnover rating given by a letter from A to H, J, N or X,

a credit rating given by a figure, 0, 3, 4, 5 or 6,

a payment rating given by a figure, 7, 8 or 9.

7KH7XUQRYHU5DWLQJ

It indicates the level of turnover according to the table below:

A turnover equal to or greater than FRF 5 billion

B turnover between FRF 1 billion and FRF 5 billion

C turnover between FRF 500 million and FRF 1 billion

D turnover between FRF 200 million and FRF 500 million

E turnover between FRF 100 million and FRF 200 million

F turnover between FRF 50 million and FRF 100 million

G turnover between FRF 10 million and FRF 50 million

H turnover between FRF 5 million and FRF 10 million

J turnover less than FRF 5 million

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

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

7KH&UHGLW5DWLQJ

The credit rating expresses the assessment made of the business. There are 5 credit ratings:

a t0t credit rating is given to a firm for which the Banque de France possesses no recent

accounting documents and about which it has received no unfavourable information,

a t3t credit rating is an excellent rating reserved for firms enjoying the best Banque de

France assessment of their creditworthiness and whose debt capacity is totally

guaranteed,

a t4t credit rating is given to firms whose situation reveals a degree of fragility

(particularly falling profitability), but which do not give cause for concern,


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Rating t040t: the information calls for particular attention. This rating is given to a

manager who holds office as a legal representative in a company which has been put

into judicial liquidation within the last five years or in two companies at least with

payment ratings oft9t.

Rating t050t: the information gives cause for concern. This rating is given to a manager

who holds office as a legal representative in two firms which have been subject to a

judicial liquidation order within the last five years or to a manager required to pay the

debts of the legal person, whatever the amount of the pecuniary liability.

Rating t060t: the information gives grave cause for concern. This rating is given to a

manager who holds office as a legal representative in at least three companies which

have been subject to judicial liquidation, or who is personally the subject of a decisionof the courts.

The information available in the FIBEN database is used in order to assess the

creditworthiness of firms and is very helpful for risk-monitoring purposes. The FIBEN data

have been used more recently for some special studies. But in the past all the studies were

conducted on the basis of the variety of information available in the tCentrale de bilanst

(Central Balance Sheet Data Office) database of the Banque de France.

7KH&G%GDWDEDVH

In 1968, at the request of the tCommissariat Gnral du Plant (Planning Commission), the

Banque de France set up a more specific corporate balance sheet database with the purpose

of complementing the national accounts with statistics on size and sector. The mission of

the Banque de France is to provide monetary authorities and economic decision-makers

with valuable information on the economic environment through the analysis of aggregated

data on firms. The data derived from company annual accounts constitute the source

material for conducting studies at a macro or microeconomic level and for undertaking

sectoral and financial analysis. This database, known as CdB tCentrale des bilanst, is a

collection of data from firms which agree to submit their annual accounts on a voluntary

basis and which, in return for their voluntary participation, receive every year individual

reports that provide useful decision-making assistance. Historical series from 1971 to the

present make it possible to study long-term economic cycles. About 38,000 firms among

the broad FIBEN population, previously mentioned, submit their corporate tax returns as

well as an additional information report (tdossier de collectet) containing more precise

information on loans from groups, the breakdown of the different financial costs and

supplementary information on leasing and on business restructuring. The additionally


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collected data for the CdB base, which are provided in a very detailed form, are extremely

important for financial analysis, especially with respect to international comparisons.

Owing to the fact that, unlike in FIBEN, most of the information necessary for harmonising

French and German balance sheets is available in the CdB base, the samples for this study

were drawn entirely from that base. This choice boils down to an approach which favours

comparability of information at the cost of a certain loss of representativeness.

The representativeness of the CdB database is regularly checked. Investigations are carried

out on the database to control the quality of the sample and the coverage based on the

number of employees. These controls are conducted by size and sector. The aim is to reach

full coverage for large enterprises (500 and more employees), especially in manufacturing

industry. The coverage rate should reach 50 % in medium-sized companies and 10 % in

small companies. If the coverage does not reach this threshold, the Central Balance Sheet

Data Office in Paris asks the branches to contact new companies of the sectors or sizes

which are poorly represented in the database. The following table shows that the coverage

is quite good in manufacturing industry in every size class according to the Banque de

France criteria. The CdB base is currently unrivalled in France because no other database

stores accounting data on the results, the cash flows and the financial structure of industrial

companies over a 20-year period.


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not very meaningful, as could be demonstrated for the German samples. Unfortunately, no

comparable results based on turnover coverage ratios are available for France. As measured

by the number of employees, the French sliding sample for 1994/95 covers approximately

60 % of the total workforce in manufacturing industries. In addition, 7DEOH

7DEOH6L]HVWUXFWXUHRIWKHVOLGLQJVDPSOHV

D)UDQFHTwo-year sliding sample (1994/1995)

Size class Number of corpo-

rations

Frequency

Total 14,476 100.0 %

1 - 19 Employees 3,125 21.6 %

20 - 99 Employees 7,901 54.6 %

100 - 499 Employees 2,772 19.1 %

500 - 1,999 Employees 577 4.0 %

2,000 and more Employees 101 0.7 %

E*HUPDQ\ Two-year sliding sample (1993/1994)

Size class Number of corpo-

rations

Frequency

Total 9,260 100.0 %

1 - 19 Employees 1,774 19.2 %

20 - 99 Employees 4,086 44.1 %

100 - 499 Employees 2,552 27.6 %

500 - 1,999 Employees 662 7.1 %

2,000 and more Employees 186 2.0 %

clearly indicates that the sectoral composition of the samples for the two countries seems to

be substantially different. The German samples primarily consist of corporations in the

intermediate and capital goods industries, while durable and non-durable consumer goods

are covered to a far less extent. Unlike the German sliding samples, the French coverage

ratios display a more homogeneous composition by sector of economic activity. Only the

capital goods sector appears to have a particularly high coverage. These differences tend to

furnish additional evidence that the Bundesbankss database is definitely more selective than

the CdB-base of the Banque de France, essentially becauce the structures of the base

material mirror the extent to which the bill of exchange is used as a financing instrument in

each particular industry.


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7DEOH'HJUHHRIUHSUHVHQWDWLYHQHVVRIWKHVOLGLQJVDPSOHV

D)UDQFHTwo-year sliding sample (1994/1995)Reference: exhaustive survey of the INSEE

Sliding sample in 1995 Coverage b\

Size/sector Number of en-

terprises

Number of

employees

number of

enterprises

number of

employees

Total 14,476 2,064,506 16.7 % 56.0 %

1-19 Employees 3,125 38,813 5.2 % 9.8 %

20-99 Employees 7,901 357,178 38.3 % 42.3 %

100-499 Employees 2,772 572,919 58.7 % 59.7 %

500-1,999 Employees 577 523,664 70.8 % 71.7 %

2,000 Employees and more 101 571,932 71.1 % 75.8 %

Intermediate goods 6,419 832,698 19.4 % 56.1 %

Capital goods 3,195 630,061 16.8 % 61.8 %

Durable consumer goods 626 84,323 12.9 % 50.6 %

Non-durable consumer goods 4,236 517,424 14.4 % 51.0 %

E*HUPDQ\Two-year sliding sample (1993/1994)

Reference: exhaustive survey of the turnover tax statistics

Sliding sample in 1994 Coverageby

Sector Number of en-

terprises

Turnover

(DM)

number of en-

terprises

turnover

Total manufacturing

RQO\LQFRUSRUDWHGHQWHUSULVHV 9,260 1,012,298,728 12.9 % 71.4 %

Total manufacturing

DOOOHJDOIRUPV (9,260) (1,012,298,728) 3.7 % 50.8 %

Intermediate goods 4,148 443,934,276 4.5 % 56.7 %

Capital goods 3,049 384,491,114 6.2 % 59.8 %

Durable consumer goods 397 34,576,763 2.0 % 37.5 %

Non-durable consumer goods 1,666 149,296,575 1.8 % 31.4 %


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'LIIHUHQFHVLQDFFRXQWLQJUHJXODWLRQVDQGUHODWHGDGMXVWPHQW

SURFHGXUHV

As the central point of this study was to focus on the financing structures of French and

German incorporated enterprises based not only on a fairly representative dataset but also

on largely comparable balance sheet information, considerable efforts were made to

harmonize the data for the two countries as far as possible in order to overcome the basic

weaknesses of most empirical studies in the field of comparative financial statement

analysis. There is no doubt that the translation of the Fourth EC Directive into national

accounting legislation represented a considerable step towards reducing the accounting and

auditing differences for individual accounts in the EU member states. However, as that

Company Law Directive only attempted to set up minimum standards for financial

reporting and, in particular, avoided standardising existing national valuation practises,

substantial differences still persist - not only in national accounting regulations but also in

country-specific accounting rules - a fact that is especially evident in the financial reporting

of French and German corporations. In addition, institution-specific concepts for the defini-

tion of certain ratios which were found for both the Banque de France and the Bundesbank

(e. g. the Bundesbankss net own funds concept) had to be suppressed, and it was necessary

to develop a comprehensive harmonized

corporate finance in france and germany

Documents