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Finance and Development

Surveys of Theory, Evidence and Policy

Edited by Christopher J. Green, Colin Kirkpatrick and Victor Murinde

In this valuable new book, a distinguished group of authors takes stock of the existing state of knowledge in the field of finance and the development process. Each chapter offers a comprehensive survey and synthesis of current issues. These include such critical subjects as savings, financial markets and the macroeconomy, stock market development, financial regulation, foreign investment and aid, financing livelihoods, microfinance, rural financial markets, small and medium enterprises, corporate finance and banking.
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Chapter 12: Company Financial Structure: A Survey and Implications for Developing Economies

Sanjiva Prasad, Christopher J. Green and Victor Murinde


12. Company financial structure: a survey and implications for developing economies Sanjiva Prasad, Christopher J. Green and Victor Murinde 1. INTRODUCTION The financial structure of a company arises from the ways in which it finances new investment. There are three main funding choices which are then reflected in a firm’s capital structure: employ retained earnings, borrow using debt instruments or issue new shares. These components of capital structure also reflect firm ownership in the sense that retentions and equity correspond to shareholder interests while borrowing gives rise to claims by debt holders. This is the broad pattern found in developing and developed countries alike (see La-Porta et al., 1999).1 Capital structure also affects corporate behaviour (Hutton and Kenc, 1998). Thus financial structure is concerned with the closely-linked relationships among financing policy, capital structure and firm ownership. The development of these relationships is a key factor in explaining how economic agents acquire and utilize assets through firms and capital markets, and create returns, whether in the form of direct remuneration, capital gains, debt interest or dividends. There is a large volume of research on company financial structure in industrial countries, but virtually no work has been done on developing countries (LDCs), apart from a limited amount of empirical research pioneered particularly by Singh: for example, Hamid and Singh (1992), Singh (1995) and Brada and Singh (1999). It is scarcely an exaggeration to state that, until recently, corporate finance did not exist as an area of research for LDCs....

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