RDP 9216: The Evolution of Corporate Financial Structure: 1973–1990 3. Behaviour of the Financial Ratios

3.1. Debt-Asset Ratio

Graph 1 presents the weighted average debt-asset ratio between 1973 and 1990. The time profiles of the 10th, 25th, 50th, 75th and 90th percentiles of the distribution of the ratio are presented in Graph 2. These graphs show that the ratio of debt to assets increased substantially during the 1980s after remaining relatively constant over the 1970s. In 1973, for our sample of firms, debt financed an average of 52 percent of firms' total assets. By 1980, this share had actually declined slightly to 51 percent. In contrast, the 1980s saw the share of debt on corporate balance sheets increase, with debt accounting for almost two-thirds of total assets in 1989 and 1990. The percentiles of the leverage distribution show that the increase in the average ratio of debt to assets cannot be accounted for by an increase in the leverage of a minority of large or highly levered firms. All percentiles show an increase in leverage over the 1980s.

These findings match those of Dempster, Howe and Lekawski (1990), who observed consistent growth in the ratio of gross debt to the book value of equity between 1981 and 1988. However, Dempster, Howe and Lekawski (1990) also considered a measure of leverage based upon a firm's market value. Specifically, they found that the ratio of interest bearing debt to market capitalisation had not trended upwards over the 1980s. Unfortunately, given that our sample of firms includes listed and unlisted companies, we are not able to calculate the aggregate market value of the firms in our sample. As a proxy for the market value of firm equity, we use the market capitalisation of all firms listed on the Australian Stock Exchange. We then calculate a proxy for the aggregate debt equity ratio by dividing the total book value of debt for our sample of firms by our proxy for their market capitalisation. This is presented in Graph 3. It shows a similar time profile to the interest bearing debt over market value of equity chart presented in Dempster, Howe and Lekawski (1990, chart 10). Our market-value based measure of leverage is significantly more volatile than our book value measure of leverage. Perhaps more importantly, it does not show an upward trend over the 1980s. Sharp increases in 1982 and 1988 and 1989 were offset by falls between 1982 and 1987.

If in fact, share prices are always equal to the present discounted value of the future stream of dividends and if financial contracts are state-contingent or financial intermediaries are risk neutral and far-sighted, then the appropriate measure of leverage is that based on a firm's market value. For instance, if a firm discovers a new technology that greatly increases its expected future profits then that firm's market value will rise. As a result, while leverage based upon the firm's book value remains unchanged, leverage based upon the firm's market value falls considerably. Given appropriately structured financial contracts, a potential lender should only be concerned with the firm's future profitability and thus the market-value based measure of leverage.

Unfortunately, we do not live in such an ideal world. There is considerable evidence that asset prices can deviate from fundamentals for long periods of time. If firms and financial institutions mistake a non-fundamental increase in share prices for an increase in future profitability and then make lending decisions based upon this misinterpretation, firms may become over-geared. In turn, an increase in the probability of financial distress may result. In addition, when the inevitable correction to asset prices occurs, firm equity is further reduced and, as a result, some firms will fail. The deterioration in equity and losses by financial intermediaries may generate a sustained period of sluggish economic activity. Thus, when considering the implications of a change in market-value based measures of leverage, it is important to consider whether the share price movements are driven by rational expectations of changes in the future value of a firm's income stream or simply reflect non-fundamental forces.

To some extent, the rapid increase in asset prices documented by Macfarlane (1990) drove the movements in market-value measures of leverage over the 1980s. As Macfarlane (1989 page 27) notes, the relatively constant ratio of debt to market capitalisation, “does not, of itself contradict the proposition that there had been an upward shift in corporate demand for debt”. The increased access to funds that accompanied financial liberalisation most probably led to an increase in the value of financial assets. This increase is likely to have reflected two factors. The first is higher real earnings in response to the removal of some liquidity constraints. Higher earnings should have been translated into higher future dividends and thus higher current share prices. Second, the financial liberalisation, and the resulting increase in borrowing, facilitated speculative asset purchases that drove up the value of the share market. It is unlikely that all share price movements were driven by changes in expected future income streams and, thus, it remains important to examine changes in the book-value based measures of leverage.

In general, the ratio of debt to the book value of assets will increase if either equity is swapped for debt or if balance sheet growth is financed using a higher share of debt than the current share of debt on the balance sheet. While swaps of debt for equity, through management buy-outs, have been popular in the United States, they have been relatively rare in Australia. Anderson and Brooks (1991) report that, before October 1990, there had only been 55 buyouts in Australia, with a combined value in excess of two billion dollars. They attribute the relative lack of leveraged buyouts to the reluctance of Australian managers to move from manager to owner status and the unwillingness of institutional lenders to support such activity.

With these swaps playing a relatively minor role in changing the structure of corporate balance sheets, the increase in debt-asset ratios primarily reflected balance sheet expansion using a higher proportion of debt than had previously been the case. This increased reliance on debt was facilitated by the financial liberalisation that took place in the first half of the 1980s. The removal of controls on interest rates increased access to intermediated credit, and the increased competition associated with financial liberalisation meant that banks were keen to expand their market share by lending. This aggressive lending allowed corporations to expand their balance sheets at a much faster rate in the 1980s than they did in the 1970s. The strong growth of firm assets is illustrated in Graph 4 which shows the average value of real total assets for the 110 firms in our sample^[6]. Between 1974 and 1979 real asset growth of firms averaged 1.6 percent per annum. In contrast, during the 1980s, real asset growth of the same firms averaged 9.4 percent per annum. Graph 5 shows the percentiles of the real total assets distribution over time. It clearly indicates the widespread nature of balance sheet expansion over the 1980s.

From Graphs 1 and 2, it is difficult to distinguish any strong relationship between the degree of leverage and the business cycle. Changes in firm leverage appear to be dominated by trend components, with the business cycle playing a relatively minor role. There does, however, appear to be some weak link between economic activity and leverage arising from the fact that balance sheet expansion is typically slower in recessions. If balance sheet growth is financed using a higher share of debt than the current share of debt on the balance sheets then slower asset growth will see slower growth in leverage. This is evidenced by the declines in leverage in 1975 and 1990 and the slower rate of increase in leverage in 1983. Each of these declines is associated with a reduction in the aggregate real assets of the firms in our sample.

The situation in 1990 is particularly interesting. The size of the combined nominal balance sheets of the firms in our sample rose by only 2.6 percent, the smallest increase for any year in our sample. As Graph 4 shows, the 2.6 percent nominal growth represented a decline in the real value of assets of the firms in our sample. This very slow nominal balance sheet growth was associated with a fall in the nominal value of debt outstanding. This can be seen in Graph 6 that shows the percentage change in the aggregate value of nominal assets and the change in nominal debt as a percentage of total assets for the 110 firms studied^[7]. It shows that 1990 was the only year in which the value of nominal debt actually fell^[8]. This fall in debt, coupled with slight growth in the size of balance sheets, meant that the weighted average debt-asset ratio declined slightly in 1990.

A counter-example to the positive relationship between balance sheet growth and leverage is evident in 1980 and 1981 where strong balance sheet growth was associated with a decline in leverage. During these years, mining companies raised a considerable amount of equity through new share issues. These equity funds were used to finance investment associated with the “minerals boom”. The increased dependence on equity funds during 1980 and 1981 is illustrated in Graph 6 which shows that, during these two years, less than half of the balance sheet expansion was accounted for by the accumulation of new debt.

While, on balance, there is some evidence that the degree of leverage is a function of the business cycle, the relationship appears relatively weak and is dominated by other factors. This, however, does not exclude the possibility that leverage has some effect on the evolution of the business cycle. Large increases in leverage, as experienced in the 1980s, may leave the economy more exposed to adverse macro-economic shocks. As Seth (1990 page 6) suggests, “if highly levered firms are also cyclical, that is, if the firms' ability to repay is directly related to the level of economic activity, there is danger of positive feedback”. Bernanke and Gertler (1990) reach the same conclusion by noting that high leverage reduces the collateral of firms, making financial institutions less willing to fund positive net present value investment projects.

Whether or not an economy that experiences an increase in leverage is more susceptible to shocks, depends, in part, upon the type of firms that are responsible for the increase in leverage. For example, if firms with highly cyclical profits are responsible for the increase, the susceptibility of the economy to adverse shocks is likely to be higher than if firms with very stable profits were responsible for the higher leverage. If firms with highly cyclical profits increase leverage, the probability of some form of credit squeeze in a recession increases. Any such credit squeeze may prolong and intensify the recession. The relationship between the cyclicality of output and leverage is explored in Section 4. However, it is also useful to examine changes in the frequency distribution of firms' leverage. An increase in average corporate debt may stem from a small subset of firms or may result from across-the-board leverage increases. Different scenarios imply different consequences for macro-economic stability. We now explore this issue in more detail.

While Graph 1 shows some small decline in the debt-asset ratio between 1973 and 1981, the percentiles in Graph 2 show that this trend is driven by the upper tail of the distribution. The 10th, 25th, 50th and 75th percentiles all increased over this period, while the 90th percentile declined from 0.79 to 0.70. The reduced role of debt for the most highly geared firms coupled with the slight increase in leverage of the less highly geared firms meant that the dispersion of leverage across firms was reduced during the 1970s, From the perspective of the 1980s, however, evolution over the 1970s was relatively minor. In terms of the business cycle effect on leverage, a general decline in leverage in 1974/75 corresponded to the slowdown in activity in the same year. This is evidenced by the decline of all percentiles, with the exception of the 25th, in Graph 2.

The increase in corporate leverage between 1981 and 1987 was widespread; each percentile of the distribution increased over this period. The debt-asset ratio at the 10th percentile increased from 0.29 to 0.37 between 1981 and 1987 while the ratio at the 90th percentile increased from 0.70 to 0.83. The bulk of the increase in the 10th percentile occurred in the early 1980s. Increases in the other percentiles also occurred in the early years of the 1980s, however, they were smaller than that of the 10th percentile.

Most firms experienced little or no further increase in leverage after 1987. The 10th, 25th and 75th percentiles actually declined between 1987 and 1990 while the median increased marginally. The debt to asset ratio at the 90th percentile also increased marginally but was considerably more volatile over the four years from 1987 to 1990. While fewer firms were increasing their leverage after 1987, the weighted average measure shows rising leverage during 1988 and 1989. This reflects rapidly increasing leverage in a small number of firms in the late 1980s. While leverage at the 90th percentile increased by 2.0 percentage points between 1987 and 1990, the 98th percentile increased by 6.3 percentage points. In summary, the increasing weighted average debt-asset ratio in 1988 and 1989 reflects increasing leverage in a small number of outlying firms. The increase in leverage that took place between 1983 and 1987 was, however, more widespread.

3.2. Interest Cover Ratio

The above discussion of the relationship between leverage and the business cycle implicitly assumed that higher leverage increased the riskiness of the firm. While this assumption is true if all other things are constant, higher leverage does not necessarily imply a higher probability of insolvency or corporate failure. For example, if interest rates fall at the same time that leverage increases, the higher leverage may not leave the firm more susceptible to earnings shocks. Even if higher leverage does increase the probability of being unable to meet current commitments from current earnings, it does not necessarily imply an increased probability of financial distress. An increase in leverage may be accompanied by a more long-sighted relationship between the firm and the provider of finance.

Also, when interpreting the effects of increasing leverage, it must be remembered that many firms were adjusting in response to the removal of a credit constraint. To the extent that they were moving from a constrained optimum to an unconstrained optimum, their increased leverage should be beneficial. However, if firms overshot their new optimal financial structure they may have become exposed to undesired levels of risk. Notwithstanding these qualifications, one measure of the susceptibility of firms to adverse shocks is the interest cover ratio. In Section 2 this was defined as profits before interest, tax and depreciation divided by interest payments.

Graph 7 shows the weighted average interest cover for the 110 firms in our sample and Graph 8 shows the time profiles of the 10th, 25th 50th, 75th and 90th percentiles. Weighted average interest cover declined substantially between 1973 and 1990. Between 1973 and 1980 the interest cover ratio averaged 6.7. By 1982, the ratio had fallen to 4.1 and thereafter it followed a slow decline. By 1990, the weighted average interest cover ratio had reached 3.0. The percentiles in Graph 8 suggest that the decline in interest cover over the 1980s was characteristic of most firms.

The expression for interest cover, given in (2), can be re-expressed as:

This expression shows interest cover to be a function of three variables: the earnings rate on assets (π/A), the average interest rate (i) and the debt to asset ratio (D/A). Ceteris paribus, interest cover declines if the rate of return on assets declines, or if the interest rate or leverage increases. The debt-asset ratio is presented in Graph 1 while the weighted average return on assets for our sample of firms is shown in Graph 9. Graph 7 shows two measures of the interest rate. The first is the overdraft rate on large corporate loans and the second is the sum of the interest payments of each firm divided by the sum of the firms' average total debt for each year. Average debt is used instead of debt as at the balance date to ameliorate the distortionary effects of changing debt levels over the financial period^[9]. For example, if debt was rising over the financial period, the interest rate, calculated by dividing interest payments by balance date debt, would underestimate the actual average rate paid.

The average interest rate paid is less volatile than, and considerably below, the overdraft rate. Part of the large difference between the two “cost of funds” measures stems from the fact that a large share of corporate debt represents trade credit that often attracts low or zero interest payments. Finns may also borrow at fixed rates for long periods of time and thus their borrowing costs are not as volatile as the interest rate on overdrafts. Notwithstanding these complications, both interest rate series are higher in the 1980s than in the 1970s and both indicate lower interest rates in 1984 and 1988. These patterns are in keeping with the evolution of interest cover over the sample period.

The business cycle is a major determinant of company profits. When the economy is growing strongly, profits are typically increasing. Conversely, in recessions the return on assets is generally comparatively low. This pro-cyclical nature of company profits is reflected, at least to some extent, in the interest cover ratio. The buoyant economy in 1973/74 saw profits increase and interest cover rise. As the economy slowed in 1974/75, profitability and interest cover declined. In 1975 the decline in interest cover was exacerbated by an increase in interest rates. Strong profitability in 1979 and 1980, coupled with a decline in the debt-asset ratio and only a small increase in interest rates, saw interest cover rise again. These changes in the 1970s were, however, relatively minor compared with those which took place in the first half of the 1980s.

Between 1980 and 1983 average interest cover fell from 7.1 to 3.8 for our sample of firms. This reflected both a significant fall in corporate profitability and higher interest rates. As the economy recovered into 1984, corporate profitability increased and interest rates declined. Previous experience would have suggested a corresponding substantial increase in the interest cover ratio. This did not occur. In fact, interest cover continued to decline, albeit at a much slower pace than had occurred in the early 1980s. This decline reflected the significant increase in leverage that occurred during the first half of the 1980s. The effect on interest cover of rising leverage was mitigated to some extent by an improvement in the rate of return on corporate assets. The higher rates of return were, however, insufficient to prevent a deterioration in interest cover. Graph 7 also confirms that interest rates played a role in the deterioration of the interest cover ratio. Interest rates were, on average, considerably higher in the 1980s than in the 1970s, making the burden associated with any given debt level, significantly higher. Movements in interest rates over the 1980s also appear to be reflected by the aggregate interest cover ratio; lower interest rates in 1984 and 1988 are matched by a higher aggregate interest cover ratio.

In a recent study comparing international trends in corporate leverage, Seth (1990) concluded that although leverage had increased in Australia in the 1980s, the corporate sector had not become more fragile because interest cover had not declined. That is, profits had grown in line with the increased debt. This conclusion was based upon a sample covering the period from 1982 to 1988. Over this period there was relatively little deterioration in interest cover compared to the declines between 1980 and 1982. However, the starting point (that is, 1982) is in a severe recession when corporate profits were being squeezed. As was argued above, interest cover would normally have improved as the economy recovered. However, the increasing debt and higher interest rates seriously limited this improvement. Instead of stabilising at a level comparable to that prevailing in the 1970s, interest cover remained at a traditionally low level. Contrary to the conclusion reached by Seth, the build up in debt caused a deterioration in the interest cover of Australian firms and, to some extent, increased their susceptibility to adverse shocks.

We now examine the frequency distribution of interest cover and its evolution through time. As Graph 8 shows, 50 percent of firms had cash flow 8.7 times their interest payments in 1973. By 1983 the median interest cover ratio had fallen to 4.0 times earnings. By 1990 the median had fallen only slightly further to 3.9. In comparison, the 90th percentile was 26.7 in 1973 and 22.7 in both 1983 and 1990.

Also from Graph 8, it is clear that the distribution of interest cover ratios is skewed. For firms with positive earnings, interest cover is bounded between zero and infinity. If profitable firms have little debt or if interest rates are low, their interest cover ratios will be high. While most firms have interest cover ratios under 10, the interest cover of some firms exceeds 20. Frequency histograms of the ratios in 1973 and 1990 are shown in Graph 10. In 1973, only 17 percent of firms had an interest cover less than 3. By 1990, this had increased to 46 percent of firms. At the other tail of the distribution, there appears to be relatively little change; roughly the same number of firms had very high interest cover in 1990 as had high interest cover in 1973.

The variation of the interest cover ratios over time is in rough proportion to their absolute levels. Because of the skewness in the distribution of the ratios, it is difficult to detect important economic influences from the percentiles in Graph 8. To overcome this problem we also present the percentiles using a logarithmic scale (Graph 11).

In Graph 11, it is clear that the large decline in interest cover between 1980 and 1982 is common to all percentiles examined. In contrast, subsequent variations are often peculiar to particular percentiles. The 75th and 90th percentiles, representing firms with high interest cover, showed slight net improvement in interest cover between 1983 and 1990 while the lower percentiles continued to display increasing interest burdens. Between 1987 and 1990, the 90th percentile rose from 19.4 to 22.7 while the 75th percentile rose from 7.9 to 10.0. Over the same period, the 50th and 25th percentiles fell to 3.9 and 1.9 from 4.6 and 2.4 respectively. The 10th percentile fell from 1.3 to 1.1.

These results are consistent with those for the debt-asset ratio. They show that for almost all firms, the period from 1980 to 1987 was associated with declining interest cover. After 1987, it was mainly those firms in the lower tail of the distribution that continued to experience deteriorating interest cover.

3.3. Dividend Pay-out Ratio

Graph 12 shows the weighted average dividend pay-out ratio and Graph 13 presents the percentiles of the distribution for each year. Between 1973 and 1988, the weighted average dividend pay-outs oscillated between 43 and 63 percent of net profits and there was no evidence of either a positive or negative trend. It does not appear that the desire to build up corporate balance sheets in the 1980s induced the majority of firms to increase their retained earnings as a percentage of net profits. After 1988, the weighted average dividend pay-out ratio increased significantly, rising from 47 percent in 1988 to 76 percent in 1990. Callen, Morling and Pleban (1992), in a study of the behaviour of firm dividend policies, attribute much of this increase to changes in the taxation system. These changes included the introduction of a capital gains tax in September 1985, the introduction of dividend imputation in July 1987 and the introduction of a 15 percent tax on the earnings of superannuation funds in July 1988. Another major factor driving the increase in the payment of dividends over the late 1980s was the rising popularity of dividend reinvestment schemes wherein firms could make the dividend payments desired by shareholders while effectively retaining the funds for future investment. The use of these schemes is also documented in Callen, Morling and Pleban (1992).

The graphs suggest that the business cycle has a considerable influence on the dividend pay-out ratio. Apart from the strong rise at the end of the sample, the largest increase in the ratio occurred in 1983. In this year, the weighted average pay-out ratio was 63 percent. 1983 was also the year in which the average return on firm assets was at its lowest. The increase in the pay-out ratio suggests that firms were unwilling to reduce the value of dividends in line with their lower profits. This is consistent with the view that dividends are used by management to signal to shareholders that the firm is basically sound. By keeping dividends reasonably high when profits are low, management signal to the owners of the firms, and to the firm's creditors, that the firm is expecting a recovery in its profitability. As a result, the dividend pay-out ratio is counter-cyclical. While the weighted average does not show an increase in the dividend pay-out ratio during slowdowns in 1974/75 and 1977/78, the percentiles show that, in both periods, a reasonably wide cross section of firms increased their pay-out ratios.

The percentiles show a wide dispersion in the dividend pay-out ratios across firms. In every year, at least 10 percent of firms have a pay-out ratio less than or equal to zero^[10]. In contrast, the 90th percentile is greater than 70 percent in most years. The increase in the pay-out ratio in 1983 appears to be a widespread feature as does the increase in 1989. It is also interesting to note that, over the 1980s, the dispersion of the ratios increased. This increase largely reflects firms in the lower quartile of the distribution reducing their pay-out ratios; in 1983, the 25th percentile was 0.40 but by 1988 it had fallen to 0.16.

Graph 12 shows that the average dividend pay-out ratios increased rapidly in 1989 and again to a lesser extent in 1990. However, the percentiles in Graph 13 do not show the 1990 increase in any of the percentiles. The weighted average between 1989 and 1990 was driven by a small number of large firms that were making high losses. In comparison, at a disaggregated level, 54 percent of firms increased their dividend pay-out ratios in 1989 compared to only 40 percent in 1990. The remaining 60 percent of firms drive the 1990 fall in the percentiles shown in Graph 13.

3.4. Creditors to Debt Ratio

Most sales by firms are credit sales. A recent survey of manufacturing firms by the State Bank of New South Wales (1992) reported that the average proportion of credit sales to total sales was 88.9 percent. Of the firms surveyed, 73.4 percent reported that the most common period over which credit was extended was 30 days while the average time taken to pay was 50.6 days. This type of credit, whereby one firm finances the purchases of its own output by another firm, constitutes an important component of the total debt of many firms. Unlike much credit from financial intermediaries, it is generally short-term and is not used to finance longer-term asset accumulation. In this section we look at the relative importance of this type of credit and at changes in its importance through time.

If capital markets are perfect, firms should be indifferent between trade and bank credit. Imperfections in capital markets often remove this indifference. In their survey of the reasons for the existence of trade credit, Schwartz and Whitcomb (1979) identify two such imperfections. The first is the existence of ceilings on interest rates and the second is the fact that information is costly to collect and that the cost differs between providers of finance. If there are ceilings on the interest rates which financial intermediaries can charge, and those ceilings are binding, then there must be disequilibrium credit rationing. That is, some firms that require funds will be unable to obtain them from a financial intermediary. In such a situation, it may be optimal for suppliers to extend finance to buyers through trade credit. This allows the buyer to achieve a more satisfactory level of gearing and allows the supplier to continue selling its product and, in so doing, earn a higher implicit rate of return than was available through the controlled interest rates available from financial intermediaries.

In many cases, information concerning the creditworthiness of a firm can be obtained with little cost to a firm's suppliers. By observing the firm's orders and its payments over a period of time, the suppliers are provided with considerable information about the firm. Thus, suppliers may have a lower cost of acquiring information concerning the firms to which they sell than do banks. As a result, they may be able to provide finance to the firm at a lower cost than could the intermediary. While this explanation of trade credit is useful for explaining why the importance of trade credit differs across various firm types, it can not explain changes over time unless the relative information costs of suppliers and intermediaries are changing.

The time profile of the weighted average ratio of trade credit to total debt is shown in Graph 14 and the 10th, 25th, 50th, 75th and 90th percentiles of the distribution are shown in Graph 15. The period between 1973 and 1981 is characterised by trade credit accounting for an increasing share of corporate debt. Over that period the average share rose from 19 percent to 26 percent. Since 1981, however, the trend has been reversed with the average share falling back to 21 percent by 1990. The percentiles show that the increase and then the fall in the share of trade credit is characteristic of a wide range of firms. All percentiles were higher in 1981 than they were in 1973 and were lower in 1990 than in 1973.

Much of this pattern in the ratio of creditors to total debt can be explained in terms of financial regulation. Up until the early 1980s, controls over the interest rates charged by banks were a principal tool of monetary policy. These controls had the effect of limiting the growth in financial intermediation. The slow growth in intermediated credit before the 1980s can be seen in Graph 16 which shows the ratio of the combined assets of all Australian financial institutions (excluding the Reserve Bank of Australia) over nominal GDP. This ratio actually fell between 1973 and 1977, only reaching its 1973 level again in 1983. With the limited growth of intermediation it is not surprising that trade credit became increasingly important over the 1970s and then declined in importance as financial markets were liberalised in the 1980s.

Graph 15 shows that the importance of trade credit varies significantly across firms. In 1990, the 10th percentile was 7 percent while the 90th percentile was 44 percent. A large amount of this variation is accounted for by industry-specific factors. For example, trade credit is relatively unimportant for mining firms and relatively important for retail firms. This issue is discussed further in the following section.

Footnotes

Real values were obtained by dividing the book value of total assets for each firm by the Consumer Price Index at 1984/85 prices, after it had been rebased to 1990. [6]

It should be noted that we cannot directly match fund sources with fund applications. Thus, the new debt of firms may be used to pay taxation, interest or dividends while their earnings may be entirely used to accumulate assets. From an accounting perspective, however, depreciation allowances, interest, taxation are deducted from earnings and the remainder is viewed as the contribution of earnings to the pool of funds available for net asset purchases. [7]

This fall in total debt precedes the decline in business credit which is apparent in aggregate credit statistics. In large part, this earlier fall reflects a major reduction in both the total debt and the total assets of a single firm in our sample. [8]

Average debt combines the debt at the beginning and end of the financial period using an arithmetic average. [9]

Dividend pay-out ratios can be negative if the firm makes a loss after tax, interest payments and depreciation. These are treated as zero in the percentile graph of dividend pay-outs. [10]