Three questions (and answers) about finance and firms

Tatiana Didier, Ross Levine, Sergio Schmukler 25 August 2015



Stock and corporate bond markets have expanded rapidly since the early 1990s, but three basic, interrelated questions remain unanswered:

  • How many and which firms issue equity and bonds in domestic and international markets?
  • What happens to the assets, sales, and number of employees of firms that issue debt and equity relative to non-issuers?
  • How does the comparative performance of issuers and non-issuers differ across firms of different sizes, i.e., across the firm-size distribution (FSD)?

Previous work has addressed components of these questions. Several papers argue that large firms are the ones that access capital markets (e.g. Harris and Raviv 1991, Myers 2003). But there is no systematic documentation of the number and size of firms issuing securities across countries and whether these have changed as the volume of capital market activity has expanded worldwide. In addition, a large literature discusses why firms issue stocks and bonds and how they perform when they do (e.g. Jensen 1986, Hart 1995, Welch 2004, Henderson et al. 2006, Kim and Weisbach 2008, De Angelo et al. 2009, Hertzel and Li 2010, Brealey et al. 2011, Graham and Harvey 2011, Shin and Zhao 2013, Shin 2014). However, this work has not studied whether that performance varies across firms of different sizes.

A separate body of research focuses on firm size and analyses whether firm growth varies along the firm-size distribution (e.g. Cabral and Mata 2003, Angelini and Generale 2008, Luttmer 2011, Arellano et al. 2012, Buera et al. 2014, Midrigan and Xu 2014). But this research has not studied the differential performance of firms of different sizes when they issue debt and equity.

New research

In a new paper (Didier et al. 2015), we assess which firms issue securities and how they perform relative to non-issuing firms across firms of different sizes. To address the three questions posed above, we construct a new dataset by matching data on firm-level domestic and international issuances of equities and bonds with balance sheet data for 45,527 listed firms in 51 countries over the period from 1991 to 2011. By linking issuance activity with balance sheet data, we document new patterns about the comparative behaviour of assets, sales, and employment for issuing and non-issuing across firms of different sizes. We conduct these analyses over a period of rapid capital market growth. Over the same period, the annual amount raised through equity or corporate bond offerings relative to GDP almost doubled for the median country in our sample.

We document three main stylised facts.

  • First, only a small number of large firms issue securities in the typical country, and among these issuing firms a small subset has raised an increasing amount of funds during the 1990s and 2000s.

That is, the growth in capital markets over this period has been associated mainly with growth in the intensive margin. In the median country, only about 20 listed firms per year issue securities in either their domestic capital market or in an international financial centre; and this number has not varied significantly over time. Bond issuers are much larger than equity issuers. The median listed firm that conducts an equity offering is more than twice as large (as measured by total assets) as the median non-issuing firm. But the median bond-issuing firm is more than 36 times as large as the median non-issuing firm. Of the few debt and equity issuers, the top five firms receive over 66% of the funds raised through bond issuances and over 77% of the funds raised through equity issuances (Figure 1). Issuers of equity and bonds are larger than non-issuers at every decile of the firm-size distribution; the distribution of issuing firms lies to the right of non-issuing firms.

Figure 1. Concentration in capital markets: Amount raised by the top-5, top-10, and top-20 issuing firms

Notes: This figure shows the median amount raised by the top-5, top-10, and top-20 issuers as a percentage of the total amount raised. This concentration measure is calculated as the median across countries of the average across years by country.

  • Second, issuers grow faster than non-issuers in terms of assets, sales, and employment, and they experience a significant boost in these different characteristics in the year that they sell securities (Figure 2).

That is, even though issuers tend to be much bigger than non-issuers, they grow much faster than non-issuers. The median issuer experiences asset growth of 12% per annum, while the median non-issuer grows at 4.5%. Because issuers are bigger and perform better than non-issuers, the firm-size distribution of issuing firms moves more to the right over time than that of non-issuing firms.

Figure 2. Growth differential: Issuers vs. non-issuers

Notes: This figure shows the difference (in percentage points, p.p.) in the average annual growth rate of total assets for issuers relative to non-issuers for the 2003-2010 period. Time 0 represents the year of the first issuance for issuing firms. Issuing firms are those that raised capital through equity or bonds between 2003 and 2010. Non-issuers are the other firms in our sample.

  • Third, with respect to the comparative performance of issuers and non-issuers across firms of different sizes, we find that smaller issuing firms grow faster than larger ones, so that the firm-size distribution of issuing firms tightens. But larger non-issuing firms grow faster than smaller ones, so that their firm-size distribution widens.

Thus, the relation between firm growth and firm size is downward sloping for issuing firms and upward sloping for non-issuing firms (Figure 3).

Figure 3. Firm growth and firm size: Issuers vs. non-issuers

Notes: This figure shows the total growth of assets between 2003 and 2010 implied by the estimated quantile regression coefficients for each decile of the distribution of firm size. Dashed lines represent confidence intervals at the 95% statistical confidence level. Issuing firms are those that raised capital through equity or bonds between 2003 and 2010. Non-issuers are the other firms in our sample.

Implications for understanding the link between firms and finance

These findings have three key messages for understanding the relation between firms and finance.

  • First, by showing that issuers of equities and bonds quickly expand their assets, sales, and labour forces relative to non-issuers, our results suggest that firms do not simply use capital markets to adjust their capital structures.

This is important because several authors have raised concerns that the recent boom in capital market activity, especially in bond markets, is related to financial motives (e.g. Avdjiev et al. 2014, Bruno and Shin 2015).

  • Second, by showing that when firms choose to issue securities they experience a material boost in assets, sales, and employment relative to listed firms that do not issue and relative to their own performance before issuing, our research suggests that there is a direct, positive connection between capital raising activity and growth at the firm level.

It is not just that firms grow faster in economies with better functioning capital markets. Rather, we find that, within an economy, issuers grow much faster than non-issuers. This evidence does not reject theories that predict that firms do not need to sell securities to reap the benefits of better capital markets, but it does establish that there is a strong positive relation between issuance and firm growth across a wide array of economies.

Third, by showing that firms of different sizes experience very different rates of growth when issuing securities, our findings stress the importance of considering corporate finance when assessing the evolution of the distribution of firm sizes in an economy and the importance of considering size when studying firm performance around capital market raising activity.


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Topics:  Financial markets Industrial organisation

Tags:  firm size, firm growth, equity and bonds issuance

Tatiana Didier

Research Economist, Office of the Chief Economist for Latin America and the Caribbean, World Bank

Willis H. Booth Chair in Banking and Finance, Haas School of Business, University of California, Berkeley

Lead Economist, World Bank


CEPR Policy Research