New Issues in Corporate Finance

Flow of funds data are used to compare methods of finance in 5 countries over the period 1970 to 1985. Many of the problems associated with previous studies are avoided by estimating net instead of gross financing proportions. The degree of consolidation of accounts, reciprocal arrangements between borrowers and lenders and compensating deposit requirements on borrowers no longer distort financing patterns. Corrections for inflation are provided by employing flow rather than stock figures and using own aggregation procedures to derive stock measures. Significant variations in financing emerge. These are not readily explained by traditional descriptions of corporate finance, in particular taxation. As an alternative, the paper suggests that relationships between borrowers and lenders establish forms of commitment that are conducive to the provision of long term finance. The separation between investment and finance, which has been the starting point of corporate finance theory, is untenable in a multiperiod context in which terms of finance define future allocation of control