Jack Glen IFC Ajit Singh U. Cambridge

1. Capital Structure, Rates of Return and Financing Corporate Growth: Comparing Developed and Emerging Markets1994-2000 Jack Glen IFC Ajit Singh U. Cambridge

2. Simple Questions • Are EM firms smaller than DM firms? • Are asset & capital structures similar in EM & DM firms? • Are rates of return different in EM& DM firms? • How do firms finance growth?

3. Conceptual Issues • Under full competition, firm differences between countries immaterial • Differences might arise from: • Sector composition • Macroeconomic environment • Legal, regulatory, tax differences • Accounting standards

4. Are There Size Differences? • Technology may dictate minimum efficient size • Large firms may have lower admin costs per unit of output • Large size may mean concentration and limited competition • Human capital may substitute for fixed assets

5. Total Assets$ millions, Median, 2000

6. Capital Structure Are DM firms more leveraged than EM firms? • Macro-environment volatility • Level of competition • Principal-agent issues • Level of market development • Most factors would argue for lower levels of debt in EM firms

7. Total Liabilities/Total AssetsMedian, %

8. Total Liabilities/Total AssetsMedian, 2000

9. Asset StructureDo EM firms hold more working capital than DM firms? • Volatile macro-environment • Undeveloped infrastructure • Uncertain supply chains • High cost of credit?

10. Fixed Assets/Total Assets% Median

11. Fixed Assets/Total Assets% Median, 2000

12. ReturnsDO EM firms produce higher returns? • Risk/return framework argues for higher returns in EM firms • Lower levels of competition would also produce higher returns • We find EM returns are lower • Also more volatile • Is this a sample period artifact?

13. Return on Assets%, Median, Inflation Adjusted

14. ROA2000, Median, Inflation Adjusted

15. How do Firms Finance Growth? • 3 Sources: • Internal Equity • External Debt • External Equity • The choice reflects • Relative costs (market development) • Target capital structure

16. Financing Sources: 1995-00% of Change in Total Assets

17. External Equity as Financing SourceAverage, 95-00, % of Total

18. Conclusions • Significant Size Differences • EM firms now have lower leverage • EM firms have less working capital • EM Returns volatile, lower • EM firms used more external equity