1. Capital Structure, Rates of Return and Financing Corporate Growth: Comparing Developed and Emerging Markets 1994-2000 Jack Glen IFC Ajit Singh U. Cambridge

2. Simple Questions Are EM firms smaller than DM firms? Are asset & capital structures similar in EM & DM firms? Are rates of return different in EM& DM firms? How do firms finance growth?

3. Conceptual Issues Under full competition, firm differences between countries immaterial Differences might arise from: Sector composition Macroeconomic environment Legal, regulatory, tax differences Accounting standards

4. Are There Size Differences? Technology may dictate minimum efficient size Large firms may have lower admin costs per unit of output Large size may mean concentration and limited competition Human capital may substitute for fixed assets

5. Total Assets $ millions, Median, 2000

6. Capital Structure Are DM firms more leveraged than EM firms? Macro-environment volatility Level of competition Principal-agent issues Level of market development Most factors would argue for lower levels of debt in EM firms

7. Total Liabilities/Total Assets Median, %

8. Total Liabilities/Total Assets Median, 2000

9. Asset Structure Do EM firms hold more working capital than DM firms? Volatile macro-environment Undeveloped infrastructure Uncertain supply chains High cost of credit?

10. Fixed Assets/Total Assets % Median

11. Fixed Assets/Total Assets % Median, 2000

12. Returns DO EM firms produce higher returns? Risk/return framework argues for higher returns in EM firms Lower levels of competition would also produce higher returns We find EM returns are lower Also more volatile Is this a sample period artifact?

13. Return on Assets %, Median, Inflation Adjusted

14. ROA 2000, Median, Inflation Adjusted

15. How do Firms Finance Growth? 3 Sources: Internal Equity External Debt External Equity The choice reflects Relative costs (market development) Target capital structure

16. Financing Sources: 1995-00 % of Change in Total Assets

17. External Equity as Financing Source Average, 95-00, % of Total

18. Conclusions Significant Size Differences EM firms now have lower leverage EM firms have less working capital EM Returns volatile, lower EM firms used more external equity