The financial behaviour of industrial and commercial companies, 1970-86

Quarterly Bulletin 1988 Q1
Published on 01 March 1988

Companies' financial decisions can usefully be divided into two categories. One set of decisions is concerned with more long-term, strategic issues, such as the choice between equity and debt finance and the maturity structure of debt. The other category relates to companies' short-term financial requirements-the need to fund the transactions associated with day-to-day business, and to cope with or respond to unforeseen developments, such as an unexpected fall in revenue or a favourable investment opportunity.

This article discusses the factors affecting these two aspects of the financial behaviour of industrial and commercial companies (ICCs) since 1970. Several important patterns are identified: the increased importance of equity finance after 1975, the collapse of the market for long-term corporate debt after 1974 and its subsequent revival since 1983, and the recent build-up in corporate liquidity. The prospects for company sector finances in the late 1980s are discussed at the end of the article. The conditions remain favourable for the use of long-term debt, and the recent fall in equity prices makes equity finance less attractive than it was for most of 1987. There is as yet little sign that the build-up of ICCs' liquid assets has begun to moderate.

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