Convergence of Corporate Finance Patterns in Europe

Abstract

We investigate the patterns of corporate financing through bank loans, bond markets and stock markets in the European Union (EU). Specifically, we examine whether the EU economies are converging towards a market-oriented or a bank-oriented financial system. Panel unit root tests and GMM regressions are applied to flow of funds data for eight EU countries over the period 1972-2004. We find that the patterns of corporate financing in the EU mimic elements of the pecking order theory of financing choices. Furthermore, the EU financial system seems to be converging on a variant of the Anglo-Saxon model, with heavy reliance on internal financing and financing from the capital market.