Working Paper: CEPR ID: DP433
Authors: Colin Mayer; Lan Alexander
Abstract: This paper compares corporate financing in the German bank-based and UK market-based systems. Large German firms pay out a lower proportion of their profits as dividends and finance a larger proportion of their investments from retentions. German banks extend more long-term finance to medium-sized firms but UK firms raise more new equity. The paper tests alternative theories of corporate finance. It finds no relation between finance and taxation, and information theories only receive limited support. Instead, it concludes that control models of corporate finance are consistent with observed patterns of finan.
Keywords: corporate finance; investment; dividends; retained earnings; models of corporate control
JEL Codes: 520
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| absence of a market for corporate control in Germany (G34) | large German firms retain a higher proportion of their profits (G35) |
| fear of hostile takeovers in the UK (G34) | firms distribute higher dividends (G35) |
| firms distribute higher dividends (G35) | necessitating more external financing (G32) |
| German banks provide more long-term financing to medium-sized firms (G21) | closer relationships between banks and firms in Germany (E58) |
| UK firms raise more new equity (G32) | UK firms distribute a larger portion of their earnings as dividends (G35) |
| UK firms distribute a larger portion of their earnings as dividends (G35) | leading to a reliance on debt financing (G32) |
| structure of the banking system and corporate governance (G38) | financing behavior (G32) |
| control theories (D73) | better explanation for financing behavior than taxation or information asymmetry theories (G40) |
| taxation does not drive the observed differences in corporate financing (G39) | NA (Y70) |