The Use of Markets for Long-Term Finance
FINANCIAL MARKETS AND LONG-TERM FINANCE
This section provides systematic evidence on how (fi nancial and nonfi nancial) fi rms used equity, bond, and syndicated loan markets during 1991–2013, distinguishing the differ-ent maturities of fi nancing within debt mar-kets.1 It shows how broad the use of capital markets is and discusses the association be-tween the use of capital markets and fi rm characteristics following de la Torre, Ize, and Schmukler (2012) and Didier, Levine, and Schmukler (2014). Most of the extensive lit-erature on the importance of well-developed fi nancial markets and their links to economic growth focuses on the size of these markets (Levine 2005; Beck, Demirgüç-Kunt, and Levine 2010).2 The evidence presented here expands on that literature by examining the activity in primary markets and by differenti-ating between short- and long-term fi nancing.
The total amount raised in equity, bond, and syndicated loan markets has grown rap-idly during the past two decades. The to-tal amount fi rms in high-income economies raised using these markets increased 5-fold between 1991 and 2013; fi rms in developing economies saw a 15-fold increase. Despite the substantial growth observed in developing economies, the gap between the two groups of economies persists. Although developing-debt is not necessarily optimal in all
situa-tions. Ideally, creditors and debtors will even-tually decide how they share the risk involved in lending at different maturities.
In many economies, however, creditors and debtors do not have ready access to long-term fi nancing. This scarcity of long-term debt instruments can signal underlying problems such as market failures and policy distortions.
Lack of long-term fi nancing also has adverse implications for economic growth and devel-opment. In particular, fi rms in these econo-mies would be reluctant to fi nance long-term projects because of their exposure to the roll-over risk associated with short-term fi nancing (Diamond 1991, 1993).
To help understand how fi rms from dif-ferent economies access short- and long-term fi nancing, this chapter documents the use of key markets (equity, bonds, and syndicated loans) by fi rms from all over the world from 1991 to 2013. The chapter analyzes the growth of long-term fi nancial markets, illus-trates how many fi rms benefi t from access to these markets, and shows how different these fi rms are from the ones that do not issue debt at all. The chapter also compares the matu-rity structure at issuance for high-income and developing economies, distinguishes between domestic and international markets, and illus-trates the extent to which the global fi nancial crisis of 2008–09 affected the main trends in these markets. The data used in this chapter come from Cortina, Didier, and Schmukler (2015), where all the series and sources are described in detail.
The evidence discussed in this chapter ad-dresses several questions. In particular, which markets do fi rms use to obtain long-term funds? How have those markets evolved?
Which fi rms access these markets? How many fi rms use long-term markets? What fi rm attri-butes are related to accessing these markets?
Are longer-term issuers different from shorter-term and equity issuers? Are there differences between fi rms from high-income and devel-oping economies? Are there differences in the provision of long-term fi nance by domestic and international markets? How did the
re-In developing economies, the total amount rose from around $40 billion to $1.2 trillion.4 In both economy groups, the use of equity rose more slowly. The rapid growth in the use of debt markets by developing economies did not begin in earnest until the early 2000s.
As a consequence, the ratio of long-term debt over equity grew from 4 to 10 in high-income economies and from 1 to 5 in developing economies during 1991–2013.
Although debt is the primary source of external fi nancing by fi rms, equity and debt markets could play complementary roles.
In particular, some studies document that a developed and liquid stock market is key in creating and aggregating information about economic activity and fi rms’ fundamentals.
economy fi rms captured 16 percent of the total amount issued in 2013, compared with 6 percent in 1991, that total equaled about 5 percent of GDP. In high-income economies, the total raised in these markets in 2013 was equivalent to about 15 percent of GDP.
Most of the growth was in the primary corporate bond and syndicated loan markets rather than in the equity markets. The two debt markets accounted for about 86 percent of the total annual fi nancing raised by fi rms in high-income economies and for about 72 percent of that fi nancing for developing-economy fi rms.3 The total amount raised annually through debt markets grew from around $1 trillion in 1991 to $6 trillion in 2013 in high-income economies (fi gure 3.1).
Equity, share of GDP Total debt, share of GDP Equity Corporate bonds Syndicated loans
0 2 3 4
1 5 6 7 8 9
0 4 6 8
2 10 12 14 16 18 20
2011 U.S. dollars, trillions % of GDP% of GDP
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
0 0.4 0.6 0.8
0.2 1.0 1.2 1.4
0 2 3 4
1 5 6
2011 U.S. dollars, trillions
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 a. High-income countries
b. Developing countries
FIGURE 3.1 Total Amount Raised in Equity, Corporate Bond, and Syndicated Loan Markets, 1991–2013
Source: Cortina, Didier, and Schmukler 2015.
also avoids excessive single-name exposure, which can be prohibited by banking regula-tion, but still preserve the commercial rela-tionship with the borrower. Moreover, the lead bank (that is, the bank that oversees the arrangement of the syndicated loan) can ob-tain fee income, thus diversifying its income sources. Last but not least, syndication allows banks suffering from a lack of origination ca-pabilities in certain types of transactions to fund loans. Later in the chapter, the trends in and patterns of syndicated loans are directly compared with those of corporate bonds.5
The importance of syndicated loan fi nanc-ing has increased over time. Corporate bonds were the main source of long-term fi nance during the 1990s, capturing around 65 per-cent of the total debt issued annually. In the early 2000s, syndicated loans began to ex-pand at a faster pace and by 2004 had sur-passed the use of corporate bonds, accounting for about 60 percent of total annual fi rm debt issued in high-income and developing econo-mies during 2004–08.6 The global fi nancial crisis slowed the growth of this market (see fi gure 3.1).
Despite the rapid increase in equity and debt issuances, few fi rms use these mar-kets and those that do tend to be large. On average, in the median high-income economy, there were only 19 issuing fi rms a year in equity markets, 22 in corporate bond mark-ers, and 10 in syndicated loan markets. The numbers were smaller for the median de-veloping economy: 8, 6, and 6, respectively (table 3.1a). None of these markets seem to have widened over the years for the typical country in either income group (fi gure 3.2).
The limited number of fi rms using these markets is consistent with large size require-ments for issues and high fi xed costs associ-ated with the issuance process. The median corporate bond issue is $89 million, the dian syndicated loan $94 million, and the me-dian equity issuance $15 million, respectively.7 Issues tend to be for large amounts because small issues are not cost effi cient. Fixed costs of issuance include disclosure (indirect costs), investment bank fees (the highest costs, typi-cally), legal fees, taxes, rating agency fees, and marketing and publishing costs (Blackwell According to this view, which dates back to
Hayek (1945), stock prices aggregate infor-mation from many market participants—
information that, in turn, might be useful for fi rm managers and other decision makers such as capital providers, consumers, competitors, and regulators. Recent empirical evidence sup-ports the infl uence of stock price information on fi rms’ investment and other corporate de-cisions (Bond, Edmans, and Goldstein 2012).
Other studies highlight the complementarities between equity and debt markets. For exam-ple, Demirgüç-Kunt and Maksimovic (1996) show how large fi rms in economies with less-developed fi nancial systems become more lev-eraged as the stock markets develop.
Within debt markets, some studies high-light the importance of syndicated loans as a source of fi rm fi nancing. Recent studies estimate that syndicated loans account for roughly one-third of total outstanding loans, and their relative importance has increased over time (Huang 2010; Ivashina and Scharf-stein 2010; Cerutti, Hale, and Minoiu 2014).
Syndicated loans also tend to be larger and to have longer maturities than other types of loans (Cerutti, Hale, and Minoiu 2014).
Moreover, because syndicated loans and corporate bonds are similar in deal size and maturity, they constitute two similar sources of fi nancing from a fi rm’s perspective (Altun-bas, Kara, and Marques-Ibañez 2010). The development of regulated secondary mar-kets and independently rated loan issuances for syndicated loans have contributed to the convergence of the two debt markets. Other benefi ts of syndication may also contribute to these trends. Allen (1990) and Altunbas and Gadanecz (2004) found that origination fees are lower for syndicated loan issuances than for bond issuances and that syndicated loans can be arranged more quickly and more discreetly. Furthermore, in developing econo-mies, syndicated loans might be more avail-able than corporate bonds for those fi rms that need large loans. Syndication is also attractive to lenders, according to Godlewski and Weill (2008). Banks can achieve a more diversifi ed loan portfolio through syndication, decreas-ing the likelihood of bank failures and con-tributing to fi nancial stability. Syndication
TABLE 3.1 Average Annual Number of Issuing Firms, 1991–2013
Issuing region/country income group Equity Bonds Syndicated loans
a. Median country
High-income countries 19 22 10
Developing countries 8 6 6
b. Pooled data by country/region
United States 1,277 1,220 1,916
China 217 127 62
India 319 83 70
Africa 32 8 18
Australia and New Zealand 650 103 102
High-income Asia 681 494 853
Eastern Europe and Central Asia 69 54 89
Developing Asia 247 122 84
Latin America and the Caribbean 110 270 69
Middle East 46 15 40
Western Europe 854 799 627
Source: Cortina, Didier, and Schmukler 2015.
Note: This table reports the average annual number of fi rms active in equity, bond, and syndicated loan markets. The fi gures in panel a are calculated as the average across years and then the median across countries, reported by country income group. Panel b reports the average across years by region.
FIGURE 3.2 Average Number of Issuers per Year by Period
Number of equity issuers Number of bond issuers Number of syndicated loan issuers a. High-income countries
12
15
3 0
5 10 15 20 25
Equity Bond Syndicated Equity Bond Equity Bond
loan
Syndicated loan
Syndicated loan
1991–99 2000–07 2008–13
Number of issuers
0 5 10 15 20 25
Equity Bond Syndicated Equity Bond Equity Bond
loan
Syndicated loan
Syndicated loan
1991–99 2000–07 2008–13
Number of issuers
21
13 13
20
17 18
b. Developing countries
3
6
2
4
6 6
15
4
6
Source: Cortina, Didier, and Schmukler 2015.
The use of capital markets seems to be much wider for some economies and re-gions than for others. For instance, the aver-age number of issuers per year in the United States is above 1,000 in each type of market (see table 3.1b). Some developing economies also stand out. Brazil in particular experi-enced a rapid development of capital markets thanks to well-established institutional inves-tors and better governance (de la Torre, Ize, and Schmukler 2012).
Among listed fi rms (large, mature, and with access to capital markets), those few that recurrently issue equity and bonds are larger, faster growing, and more leveraged than non-issuers (see box 3.1 for the cases of China and India). These differences across fi rms are and Kidwell 1988; Zervos 2004; Borensztein
and others 2008). Because they restrict the ability of smaller fi rms to issue securities in capital markets, these costs have an impact on the supply side of the issuance activity.8 Demand forces (such as the investor base) are also important because they drive the charac-teristics of the securities offered. In some econ-omies, such as Chile and Mexico, institutional investors demand certain types of securities and thus determine the cohort of companies using capital markets. Small and medium en-terprises (SMEs), which are particularly de-pendent on external fi nance, cannot benefi t from the use of these markets and have to rely on banks (through bilateral loans) to fi nance investments.
BOX 3.1 Finance and Growth in China and India
China and India are hard to ignore. Over the past 20 years, they have risen as global economic powers at a very fast pace. By 2012 China had become the second-largest world economy (based on nominal gross domestic product [GDP]) and India the tenth.
Together, China and India account for about 36 per-cent of the world’s population.a
Their fi nancial systems have also developed rap-idly and have become much deeper according to sev-eral broad-based standard measures, although they still lag behind in many respects. For example, stock market capitalization in China increased from 4 per-cent of GDP in 1992 to 80 perper-cent in 2010; in India it rose from 22 percent of GDP to 95 percent during the same period. By 2010, 2,063 fi rms were listed in China’s stock markets; 4,987, in India’s.
The financial systems of these two countries have not only expanded but have also transitioned from a mostly bank-based model. Equity and bond markets in China and India have expanded from an average of 11 percent and 57 percent, respectively, of the fi nancial system in 1990–94 to an average of 53 percent and 65 percent in 2005–10 (Eichengreen and Luengnaruemitchai 2006; Chan, Fung, and Liu
2007; Neftci and Menager-Xu 2007; Shah, Thomas, and Gorham 2008; Patnaik and Shah 2011).
Importantly, this expansion was not associated with widespread use of capital markets by fi rms. For example, the number of Chinese fi rms using equity markets to raise capital increased from an average of 87 a year in 2000–04 to 105 in 2005–10, out of an average of 1,621 listed fi rms.
At the same time, fi rms that use equity or bond markets are very different and behave differently from those that do not do so. While nonissuing fi rms in both China and India grew at about the same rate as the overall economy, issuing fi rms grew twice as fast in 2004–11. Firms that raise capital through equity or bonds are typically larger than nonissuing fi rms initially and become even larger after raising capital. Firms grow faster the year before and the year in which they raise capital.
These fi ndings suggest that even in fast-growing China and India, where fi rms have plenty of growth opportunities and receive large infl ows of foreign capital, and where thousands of fi rms are listed in the stock market, only a few fi rms directly partici-pate in capital market activity.
a. See Didier and Schmukler (2013) for a more detailed analysis.
smaller proportion of fi rms uses these mar-kets.10 The larger proportion of small and medium fi rms in developing economies also implies that a larger proportion of fi rms is un-able to access external fi nance through the use of these markets (Tybout 2000; Gollin 2008;
Poschke 2011).
Within the maturity spectrum, fi rms that raise capital at the long end are typically the largest, oldest, and most leveraged. For exam-ple, the median equity issuer in high-income economies has assets of about $246 million, the median shorter-term bond issuer (fi rms issuing bonds with maturity of fi ve years or statistically signifi cant (table 3.2). There are
also large differences across issuers: fi rms that issue bonds are larger, more leveraged, and older than fi rms that issue equity.9 This re-sult stands in contrast with the pecking-order view of corporate fi nance which suggests that more opaque fi rms have a greater tendency to tap bond markets before issuing equity (Myers and Majluf 1984; Fama and French 2002; Frank and Goyal 2003, 2008).
Although large fi rms have access to se-curities markets in both high-income and developing economies, there are fewer large fi rms in the developing world, and so a much
TABLE 3.2 Firm Characteristics by Country Income Group, 2003–11
Characteristic Nonissuers Equity issuers
Shorter-term bond issuers
Longer-term bond issuers a. High-income countries
Total assets (millions, 2011 $) 123.4 246.2** 1,406.7*** 6,739.8***
Sales (millions, 2011 $) 114.8 1,140.1** 295.2*** 2,569.5***
Number of employees 225 344*** 948*** 5,521***
Asset growth (%) 3.6 8.5*** 8.9** 6.7***
Sales growth (%) 4.2 8.8*** 5.7** 5.5**
Employee growth (%) 0.7 4.9*** 5.0*** 3.2***
Leverage (%) 49.4 52.2*** 57.3*** 62.5***
Long-term debt/total liabilities (%) 16.7 21.0*** 29.7*** 39.1***
Return on assets (%) 3.1 2.7** 1.3*** 3.9**
Firm age (in 2011) 23 17*** 20** 32**
Number of fi rms 16,857 11,516 1,166 2,587
Share of total fi rms (%) 56.27 38.44 3.89 8.6 Number of observations for total assets 119,001 81,949 8,984 20,022
b. Developing countries
Total assets (millions, 2011 $) 66.0 191.2*** 866.7*** 2,027.3***
Sales (millions, 2011 $) 49.6 111.8** 257.9*** 744.1***
Number of employees 498 814** 3,750*** 2,777***
Asset growth (%) 4.3 13.1*** 12.3*** 11.4***
Sales growth (%) 7.6 10.5*** 13.9*** 11.7***
Employee growth (%) 1.6 4.2** 4.3** 4.5**
Leverage (%) 47.3 51.2** 57.8*** 59.1***
Long-term debt/total liabilities (%) 11.8 20.9*** 30.7*** 42.0***
Return on assets (%) 4.1 4.6** 5.0** 4.8**
Firm age (in 2011) 30 21*** 25** 35**
Number of fi rms 10,328 4,682 558 688
Share of total fi rms (%) 66.3 30.1 3.6 4.4
Number of observations for total assets 69,650 31,579 4,262 5,150 Source: Cortina, Didier, and Schmukler 2015.
Note: This table reports the attributes for the median fi rm. They are calculated as the median across countries of the median fi rm per country. The fi rm-level data are averages across time per fi rm. The table also reports the statistical signifi cance of median tests for each group of issuing fi rms vs.
nonissuers. Nonissuing fi rms are those that did not issue during this time period. Longer-term bond issuers are defi ned as fi rms that issue bonds with maturity beyond fi ve years at least once over the period. Shorter-term bond issuers are the rest of bond issuers in the sample. Signifi cance level:
* = 10 percent, ** = 5 percent, *** = 1 percent.
developing economies is slightly higher than in high-income economies. For instance, the average maturity of corporate bonds is 6.7 years in the median high-income economy and 7.2 years in the median developing econ-omy (table 3.3a).11 This pattern is consistent across economies and regions (table 3.3b).
Among different sectors, fi nancial fi rms typically issue shorter maturities than nonfi -nancial fi rms and capture a larger share of the total amount issued in bond markets by high-income economies compared with developing ones. In high-income economies, the fi nance sector captures 65 percent of the total amount raised and the average maturity is 5.9 years;
in developing economies, the fi nancial sector accounts for 49 percent of the total with an average maturity of 6.7 years (fi gure 3.3; table 3.3a). Within the nonfi nancial sector, fi rms lo-cated in high-income economies issue bonds at slightly longer maturities (0.4 years longer on average) than those in developing economies.
In syndicated loan markets, the average maturity of loans is shorter for fi rms in high-income economies than for fi rms in develop-ing economies. The average maturity is 5.8 years in the median high-income economy shorter) has assets of about $1.4 billion, while
the median longer-term bond issuer (fi rms is-suing bonds with maturity beyond fi ve years) has assets of about $6.7 billion. In developing economies, those numbers are $191 million,
$867 million, and $2 billion. These differences in size among different types of issuers are also apparent if the number of employees or sales is considered rather than total assets (see table 3.2). Moreover, longer-term bond issuers are around 12 years older than shorter-term is-suers in high-income economies and 10 years older in developing economies. These fi ndings regarding fi rm size and maturities are con-sistent with the theory that smaller fi rms are
$867 million, and $2 billion. These differences in size among different types of issuers are also apparent if the number of employees or sales is considered rather than total assets (see table 3.2). Moreover, longer-term bond issuers are around 12 years older than shorter-term is-suers in high-income economies and 10 years older in developing economies. These fi ndings regarding fi rm size and maturities are con-sistent with the theory that smaller fi rms are