Firm Financing Choices in a Thin, Capital Constrained Market

This paper examines the financing choices made by New Zealand firms and the factors that influence those choices over the period 1984 to 2009. New Zealand firms are faced with relatively thin capital markets that lack scale and participation. The paper therefore provides an alternative perspective on how firms raise finance and refinance their activities. The paper finds that there are consistent trends in the financing policies of New Zealand firms, and in the factors that influence those policies, over the period examined. Key factors determining firms’ financing policies are profitability, growth, levels of indebtedness, financing deficits or surpluses, and firm size. In contrast with the United States, New Zealand firms on average issue significantly more debt than equity. However, a significant proportion of firms maintain a consistent policy over time of not issuing debt, while many firms consistently issue and repay debt but do not engage in equity financing.