Journal of Multinational Financial Management 10 2000 109 – 132
The deregulation of capital markets in France
Benedicte Millet-Reyes
Long Island Uni6ersity School of Business, Public Administration, and Information Sciences,
1
Uni6ersity Plaza, Brooklyn, NY
11201
-
5372
, USA Received 13 November 1998; accepted 20 July 1999
Abstract
This paper investigates how the deregulation of French capital markets affected corporate investment in the 1980s. Access to public financial markets may be less important in
countries that have traditionally relied on institutional investors to finance their corporate investment projects. This should be true for France where, contrary to the US, banks and
government agencies have always been involved in firms’ long term activities. In this study, French firms are categorized based on their ownership structure and trading characteristics.
Two investment models are augmented with measures of corporate liquidity in order to test the role of internal funds on investment. Empirical results show that only small French firms
trading on the secondary stock market have to rely on liquid assets to finance their capital expenditures. French firms with strong bank ties avoid this constraint since they are allowed
to maintain higher debt levels. © 2000 Elsevier Science B.V. All rights reserved.
JEL classification
:
G31; G32 Keywords
:
Deregulation; Liquidity; Investment www.elsevier.comlocateeconbase
1. Introduction
This paper studies the investment behavior of French corporations during the 1980s. This period was characterized by significant political changes leading to the
privatization of French banks and the expansion of the Paris Stock Market. Three types of companies are examined in this paper: industrial groups with bank ties,
Tel.: + 1-718-4881150; fax: + 1-718-4881125. E-mail address
:
breyeshornet.liunet.edu B. Millet-Reyes 1042-444X00 - see front matter © 2000 Elsevier Science B.V. All rights reserved.
PII: S 1 0 4 2 - 4 4 4 X 9 9 0 0 0 2 3 - 7
industrial groups without bank ties, and independent firms. The first category consists of large corporations with institutional shareholders banks, insurance
companies, and government agencies. The second class of firms is limited to large industrial groups that do not have any significant link with France’s main
institutional investors. The third category includes small and independent firms that do not belong to any consolidated group and do not have any large
institutional shareholders in their ownership structure.
First, this study investigates whether ownership structure had an impact on corporate investment in the 1980s. Bank owners can provide access to debt as
well as monitoring of the firm. They are expected to mitigate the information and incentive problems that lead to sub-optimal investment behavior. In con-
trast, firms without any bank links are expected to face larger information asymmetries and agency conflicts. As a result, these companies have limited
leverage and rely on internal funds to finance their capital expenditures. In a second step, I test whether access to public capital markets modified corporate
investment during this period. In France, well-established firms are traded on the largest stock market where information asymmetries between owners and in-
vestors are limited. In contrast, younger firms are often traded on the second or over-the-counter market. They should be more financially constrained because of
their limited access to external funds. Third, the period covered by this sample provides a good opportunity to study how French corporations adapted their
investment behavior to the deregulation of the French economy. Well-established firms as well as growing companies looking for external investors benefitted from
the liberalization of French capital markets. Last, this paper provides new evi- dence on the limited role of cash flow as a determinant of the level and timing
of corporate investment. Cash and working capital variables are shown to be more consistent in their explanatory power.
The remainder of this paper is organized as follows. Section 2 summarizes the existing literature on corporate investment. Section 3 describes key aspects of the
French economy and capital markets during the 1980s. Comparison is made with the financing characteristics of Japanese and American firms. In Section 4, a
panel of French companies is studied for the period 1987 – 1990. A Tobin’s Q model of investment is augmented to include measures of liquidity. First, the
role of working capital and cash flow is tested on a sample split by shareholding characteristics. In a second step, stock exchange categories are used to differenti-
ate corporate investment patterns. Last, this section examines how financing conditions evolved between 1983 and 1990. Section 5 complements the previous
section by using an Euler equation approach. Since information on stock prices is not used in the specification of this model, the new sample covers a longer
time period from 1983 to 1990. A borrowing limit is included in the Euler equation model, and the multiplier associated with this constraint is parameter-
ized as a function of the company’s stock of liquid assets. Section 6 provides conclusions on the implications and restrictions of this study.
2. Corporate investment theory
