An empirical investigation of business financial structures in a regulated economy

Abstract

THE PROBLEM OF DETERMINING the optimal financial structure is not confined to privately owned, value-maximising businesses in market economies but also exists for state-owned firms in regulated economies.1 Although extensive studies have been conducted on the general economic conditions in regulated economies (Kornai, 1980), the financial structure issues have largely been ignored. Research on the financial structure of value-maximising enterprises in market economies might be useful for state-owned firms (Myers, 1984), but the optimal financial structure for a company in a regulated economy may be different from that for an enterprise in an existing market-oriented economy owing to the different operating and financial environments (Granick, 1974). The transition from a centrally planned to a market economy might therefore entail significant innovative financial policy changes. In order to provide further insight into these issues, the financial structure of state-owned businesses in a regulated economy can be compared with those of privately owned businesses in a market-oriented economy. For this purpose, Hungary and West Germany are chosen. Hungary represents one of the first centrally planned communist countries to begin the path towards a market economy, while West Germany represents an example of a market-oriented economy that many reforming East European countries now wish to imitate (Der Tagesspiegel, 1990; and Nepszabadsag, 1990). In this article some testable characteristics of a regulated economy are briefly reviewed, the data and empirical findings are described, and the analysis is summarised.