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IV. THE STOCK MARKET AND THE FINANCING OF CORPORATE GROWTH IN AFRICA

Guest post by: International Monetary Fund

Article Overview: Having looked at the trends and characteristics of stock markets in Africa, this section examines the contributions of the stock markets to the financing of corporate growth in Africa.

IV. THE STOCK MARKET AND THE FINANCING OF CORPORATE GROWTH IN AFRICA

Having looked at the trends and characteristics of stock markets in Africa, this section
examines the contributions of the stock markets to the financing of corporate growth in
Africa. In particular, we examine whether large African corporations have made significant
use of the stock market to finance their growth. As pointed out by Mayer (1988), there are
two sources of information for studying aggregate corporate financing patterns in different
countries. The first is national flow of funds statement that record flows between different
sectors of an economy and between domestic and overseas residents. The second source is
company accounts that are constructed on an individual firm basis but are often aggregated or
extrapolated to industry or economy levels.
Both sources have their advantages as well as limitations.3 Theoretically, flow of funds
statistics provide a comprehensive coverage of transactions between sectors because they
cover all sectors in the economy, and are collected in ways, which are largely comparable
between countries. The problem with flow of funds data is that it captures only flows of
funds from one economic sector to another and thereby eliminates entirely intra-sectoral
flows. Company accounts are only available for a sample, often quite small, proportion of a
country’s corporate sector. However, the data that are employed in company accounts are
usually more reliable than flow of funds. More specifically, flows of funds are constructed
from a variety of different sources that are rarely consistent. As a result, statistical
adjustments are required to reconcile entries. A fundamental distinction between flow of
funds statistics and company accounts is that flow of funds only relates to domestic activities
while company accounts are constructed on a worldwide basis including foreign
subsidiaries.

The analysis of the paper shows that the stock markets have contributed to the financing of
the growth of large corporation in certain African countries. Corporate financing patterns in
certain African countries suggest that stock markets are an important source of finance. In
Ghana, the stock market financed about 12 percent of total asset growth of listed companies
between 1995-2002. In South Africa, liabilities accounted for 61 percent of total financing
and retained earnings and external equity financed 21 and 18 percent respectively of total
assets growth between 1996 and 2000 (Glen and Singh, 2003). In Zimbabwe, external
finance contributed 75.4 percent of total funds and internal finance provided the remaining
25 percent between 1990-1999. Equity financing was the most important source of long term
finance at 7.8 percent. Long term bank loans and bonds were each a very minor component
of total external financing (Mutenheri and Green, 2003). In Mauritius, the stock market
financed about 9 percent of total asset growth with retained earnings and external debt
contributing 30 and 61 percent respectively to the financing of total asset growth between
1992-1999 (Lalchand, 2001). In all four countries, the stock markets were for these
companies the single most important source of long term external finance.

Globally, Glen and Singh (2003) find that liabilities accounted for 49 percent of total
financing over the period 1996 to 2000. Of the remaining 51 percent, internal equity
represented 29 percent, with external equity representing 22 percent. Glen and Singh (2003)
also found substantial differences in the pattern across advanced and developing countries
and across individual countries. They find that the use of liabilities to finance growth was
much lower in emerging market group, with that lower level offset by higher levels of both
internal and external equity.

How does the corporate financing patterns in Ghana, Mauritius, South Africa, and Zimbabwe
compare with other emerging market countries? Our results show that corporate financing
patterns in these countries are broadly similar to the pattern observed for other emerging
market countries:
• In Ghana, Mauritius, South Africa, and Zimbabwe, listed corporations rely much less
on external finance to finance asset growth than corporations in other emerging
markets. The average external finance ratio is 77.5 percent in Ghana, 70 percent in
Mauritius, 79 percent in South Africa, and 75.4 percent in Zimbabwe. Other emerging
markets like Korea, India, Malaysia, and Thailand have a higher reliance on external
finance. In Thailand, for instance, corporations rely almost entirely (94.3 percent) on
external finance to finance assets growth.
• New equity issues are surprisingly a significant source of finance for quoted African
corporations. It ranges from 7.8 percent in Zimbabwe to about 19 percent in South
Africa. The median value for Ghanaian corporations is 12 percent. The contribution
of equity finance to total asset growth is broadly similar to the pattern we observe for
other emerging markets. The corresponding figures for other emerging markets are
31.2 percent in Korea, 14.6 percent in India, 9.6 percent in Malaysia, and 16.1 percent
in Thailand.
What do these results imply for the issue of stock market development in African countries?
The results suggest that the stock market has played a great role in financing the growth of
large African corporation and that stock market development has been important. However,
the shortcomings inherent in a stock market based system require us to examine whether the
economies as whole have benefited through, for example, greater savings and investment, or
increased investment productivity. There is very little systematic evidence on this issue for
African countries.

IMF Working Paper
African Department
Stock Market Development in Sub-Saharan Africa: Critical Issues and Challenges
Prepared by Charles Amo Yartey and Charles Komla Adjasi
August 2007

Related Articles
  Introduction: Stock Market Development in Sub-Saharan Africa
  VI. A. Macroeconomic Stability: WHAT DETERMINES STOCK MARKET DEVELOPMENT IN AFRICA?
  VI. B. Banking Sector Development: WHAT DETERMINES STOCK MARKET DEVELOPMENT IN AFRICA?
  VII G. Strengthen Education: PROMOTING STOCK MARKET DEVELOPMENT IN AFRICA
  VIII. SUMMARY AND CONCLUSION: Stock Market Development in Sub-Saharan Africa

Article Tags: company accounts, corporate financing, corporate sector, corporations, cou, different sectors, economic sector, economy, foreign subsidiaries, fundamental distinction, overseas residents, proportion, record flows, sectoral, sources of information, statistical adjustments, statistics, stock market, stock markets, worldwide basis



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