FACTORS AFFECTING EQUITY FINANCING OF LARGE AMERICAN INDUSTRIAL CORPORATIONS, 1946-56*

Abstract

EQUITY ISSUES HAVE made up only a small proportion of total longterm external financing by corporations in the United States since the end of World War II. This caused much discussion, especially in the early part of the period, concerning the factors affecting corporate financing. Since the extent of external equity financing varied considerably from 1946 through 1956, a study of corporate financing during that period may disclose the important determinants of such financing. The ratio of external equity financing to total long-term external financing by large industrial corporations displayed greater variation than did the ratio for all corporations. The purposes of this thesis are (1) to determine the most important factors causing the fluctuations in the amount of equity issues and in the ratio of equity issues to total long-term issues by large industrial corporations in the period 1946-56 and (2) to determine the way in which each of these factors affected equity issues in the period. The data for the study came primarily from a random sample of one hundred firms taken from the list in Fortune Magazine of the five hundred largest industrial corporations in the United States in 1955. Since all the preferred stock issues by the corporations were found to include predominantly creditorship covenants, equity issues as defined in the thesis include only common-stock issues. Although debt issues accounted for a large proportion of total issues, the ratio of aggregate equity capital to the total assets of all the corporations was sustained throughout the period by the high level of retained earnings in most of the years. An adequate equity buffer, low financial charges, and good earnings during most of the period meant that debt financing could be used predominantly to obtain any outside capital that was needed without incurring an excessive amount of financial risk. Four factors seem to explain most of the variation in equity issues