TRENDS IN THE VOLUME AND COMPOSITION OF EQUITY FINANCE*

Abstract

A FLOOD OF DATA on current and past sources of corporate funds has become available within the last decade. Thanks to the data provided by the National Bureau of Economic Research, the Department of Commerce, the Federal Reserve, and the Securities and Exchange Commission, we can now trace past trends and cycles as well as current developments in the pattern of corporation financing. It is by now well known that since World War II internal equity finance-the re-investment of retained earnings and depreciation funds-has provided a huge proportion of total corporate funds, and that external equity finance-new common stock issue-has played a relatively small role. It has also been popularly assumed that these recent trends are unique, especially as compared with earlier periods of this century. Now, however, we have findings by Professors Lintnerl and Miller2 which deny that fundamental shifts in equity finance have occurred in the post-war period: Lintner denies the uptrend in internal equity finance, and Miller denies the downtrend in external equity finance. The main purpose of this paper is to present evidence that a basic change has indeed taken place since World War II in the composition of equity finance; namely, the substitution of internal for external equity finance. In effect, the relative importance of the two components has changed. This result tends to reject the conclusions of Lintner and Miller. The causes and implications of this structural change in corporate financial patterns will also be explored. It will be argued that the shift from external to internal equity sources of funds: