- Figure 15 2 Financing Decisions By U S Nonfinancial Corporations 150 125 Internal Financing New Equity New Debt 100 1 (223.46 KiB) Viewed 83 times
(Figure 15.2 page 487 and
the discussion on page 488). Explain the reasons for this pattern
of financing using all
relevant topics/theories of capital structure
Figure 15.2 Financing Decisions by U.S. Nonfinancial Corporations 150% 125% Internal financing New equity New debt 100% 75% 50% 25% 0% -25% -50% -75% -100% -125% -150%LLLL LL L 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 SOURCE: Board of Governors of the Federal Reserve System."Flow of Funds Accounts of the United States." Federal Reserve Statistical Release. June 9, 2011, <http://www.federalreserve.gov/releases/21/20110609. three sources of funds must add to 100 percent. If you are wondering why net equity is a negative number, it is because corporations repurchased more stock than they issued in that year. In fact, new equity was negative in all the years of our sample, indicating that the dollar amount of stock buybacks exceeded the dollar amount of stock issues in each year of the sample period. The figure illustrates a number of points. First, internally generated cash flow has been the dominant source of financing. Second, this dominance has increased over the sample period, with internal financing actually exceeding 100 percent for most of the years from 2002 to 2010. A number above 100 percent implies that external financing is negative. In other words, corporations are, in dollar terms, redeeming more stocks and bonds than they are issuing. Third, net stock buybacks appear to have accelerated from 2002 to 2007. It is argued that firms were flush with cash during this time and found stock repurchases more attractive than dividend pay- ments. However, the economic problems beginning in 2008 greatly reduced the dollar amount of stock repurchases. Stock repurchases will be discussed in more detail in later chapters.