The Future of Corporate Governance in Capital Markets Following the COVID-19 Crisis

Report

30 June 2021

2. Trends in the corporate sector and capital markets pre‑COVID‑19

Abstract

This chapter provides a detailed account of the state of the non-financial corporate sector in the two decades prior to the COVID‑19 pandemic. Using firm level data, it offers analysis of corporate capital structures, investment and performance; the use of market‑based financing; corporate ownership structures; and payouts policies. Documenting the structural trends in place prior to the pandemic enables a more informed analysis of the impact of the crisis, the subsequent recovery and the associated policy measures. As such, this chapter serves as background, setting the scene for the remainder of the report.

The COVID‑19 crisis has had a major impact on the corporate sector around the world. The unprecedented sudden shock caused a sharp contraction in economic activity and corporate revenues. It also changed the conditions for corporate access to finance and investment. However, not all firms and sectors are affected to the same degree or in the same way. While many companies have lost their investment grade rating or even defaulted on their debt, some have experienced higher sales and increased their market share. Some sectors, such as services, and economies that heavily rely on consumer spending have been hit harder than others.

However, variations in the impact of the crisis at the firm level can also be linked to underlying conditions that left some companies more vulnerable going into the crisis, such as high leverage levels and long‑term weaknesses in company performance. To be able to analyse the impact of the crisis, the conditions for the recovery and how to increase resilience of the corporate sector, it is first essential to understand the status of firms and industries entering the crisis. Using firm‑level data, this chapter provides indicators and analysis on capital structures, corporate performance, the use of market‑based financing, corporate ownership structures and payout policies over the last two decades. It serves as background for the rest of the report.

2.1. The capital structure and performance in the corporate sector

The business sector accounts for the large majority of the production, employment and exports in the world economy. Corporations are also the main source of investment in fixed capital as well as research, innovation and human resources. While the listed non‑financial corporate sector represents a small share of total number of companies, it makes up a large part of the world economy, with a market capitalisation of USD 70 trillion by the end of 2019.

The availability of standardised financial information for listed companies allows for a comparable and reliable analysis of key indicators. To provide an overall comparative analysis of their capital structure, performance and investment before the outbreak of the pandemic, this section uses financial information from approximately 31 000 listed non‑financial companies from around the world (Table 2.1).

	Market capitalisation (USD trillion)	Leverage	ROE	ROA	Turnover	Investment ratio	No. of companies
Global	70.0	31%	9%	4%	68%	8%	30 962
OECD	51.3	31%	10%	4%	69%	9%	16 296
United States	27.9	33%	13%	4%	70%	10%	2 861
Europe	13.2	32%	9%	3%	65%	8%	4 708
Japan	5.5	26%	9%	4%	81%	8%	3 464
China	8.9	29%	7%	3%	67%	7%	4 226

Note: Leverage is measured as total financial debt divided by total assets. Turnover ratio is measured as total sales divided by total assets. Investment ratio is measured as the sum of capital expenditure, and research and development (R&D) expenses over total sales.

Source: OECD Capital Market Series dataset, Thomson Reuters Datastream, see Annex for details.

The overall capital structure of the non‑financial corporate sector shows a stable trend over time. As seen in Panel A of Figure 2.1, the aggregate size of listed company balance sheets was USD 74 trillion at the end of 2019. In 2019, equity, including retained earnings, accounted for 40% of the total assets, while liabilities represented 60%. Liabilities include both financial debt - interest bearing - and non‑financial debt such as accounts payable, tax payables and others. The portion of financial debt in liabilities has increased since 2005 by 5 percentage points to 51%.

Despite a steady increase in total assets over the last decade, growth in sales and profits has been sluggish. While aggregate sales in 2019 were only 12% higher than in 2008, total assets increased almost 40% over the same period. At the same time, total profits fluctuated around USD 2.5 trillion throughout the period. As shown in Panels C and D of Figure 2.1, aggregate sales and profits dropped by 10% and 23% respectively in 2009 following the 2008 financial crisis. After this crisis, sales and profits recovered but experienced a slowdown in 2015. The 2015 downturn in profits was mainly driven by the economic slowdown in Brazil and Canada as listed companies of both countries recorded significant losses. Then, in 2017, the global economic upswing along with stronger commodity prices, resulted in an aggregate growth in sales and profits.

Figure 2.1. Overview of global non‑financial listed corporate sector

With respect to performance indicators for non‑financial listed companies worldwide, a first observation in Figure 2.2 is that the asset turnover ratio (sales divided by total assets) has decreased from 86% to 68% over the past fifteen years. Asset turnover ratio measures the relative efficiency with which a firm uses its assets to generate sales. A lower ratio indicates that more assets are required to obtain the same level of sales. To improve their operating efficiency, firms generally have to identify investment needs to increase sales to achieve their growth target. However, over the past decade, the growth in total assets has not been associated with a corresponding growth in sales. A possible reason behind the decreasing asset turnover ratio can be overcapacity in certain industries, as well as a diminishing marginal productivity of capital.

Along with the decrease in operating efficiency, aggregate firm profitability has also decreased. Return on assets (ROA) and return on equity (ROE), measures of profitability, have both dropped at the aggregate level. After the sharp decrease in profitability experienced during the 2008 financial crisis, both ROA and ROE picked up in 2010 and 2011. When the European corporate sector was hit by the 2012 European sovereign debt crisis, it also drove down profitability ratios globally. After reaching its lowest levels in 2015, both ROA and ROE were almost back at the 2012 levels by the end of 2018.

Figure 2.2. Operating efficiency and profitability of listed non‑financial companies

A closer look at company level profitability in Figure 2.3 shows that the overall decline in profitability ratios has been driven to some extent by a decrease in the share of high‑performing firms. For example, the share of firms with ROA over 10% among all listed non‑financial companies dropped from 16% in 2005 to 11% in 2019, and the share of firms with ROE over 20% dropped quite drastically from 18% to 12% over the same period.

Figure 2.3. Share of high-profitable listed non-financial companies

Firm leverage ratios at the aggregate level, measured by financial debt over total assets, increased immediately after the 2008 financial crisis followed by a brief fall, which could possibly be explained by deleveraging in the banking sector and/or the exit of highly leveraged firms (Figure 2.4, Panel A). After 2012, however, leverage levels increased and at the end‑2019 they remained considerably above the pre‑2008 crisis levels. While the pattern of increased leverage is the same, it also appears from Panel A that median leverage is much lower than aggregate leverage, indicating that larger firms are the ones with higher leverage ratios. As illustrated in Panel B of Figure 2.4, the leverage distribution across firms has been stable over the years. By the end of 2019, around 11% of listed firms had leverage ratios over 50%.

Figure 2.4. Leverage of non‑financial listed companies

A common indicator used to analyse a company’s ability to service its financial and other debt is the debt‑to‑EBITDA ratio. This ratio shows the indebtedness level against the revenue generating capacity of the company and provides a proxy for the debt sustainability of the borrower. Higher values reflect a lower capacity to service debt. In 2005, the aggregate debt‑to‑EBITDA ratio was 2x, which after the 2008 financial crisis rose to 3x (Panel A, Figure 2.5). Following modest improvements in 2010 and 2011, the ratio continued its upward trend until the end of 2015, when it reached 3.3x. At the end of 2019, it stood at 3x. Another important observation is that the share of companies that can be considered in the higher risk category with respect to their ability to service their debt has also increased over the past decade. Firms with debt‑to‑EBITDA over 4x increased from 18% to 23% during the 2005‑2019 period (Panel B, Figure 2.5).

Figure 2.5. Debt-to-EBITDA ratio of non-financial listed companies

Figure 2.6 further explores whether the increase in outstanding debt over the past decade has been proportionate between different risk groups of companies in terms of debt‑to‑EBITDA ratios. The analysis shows that the debt has been accumulated mainly in firms with lower debt servicing capacity. Notably, the total nominal debt held by firms with debt‑to‑EBITDA ratio over 4x more than doubled from USD 4.4 trillion to USD 11.1 trillion. As a result, their share in total amount of corporate debt increased from 39% in 2007 to 49% in 2019.

Figure 2.6. Debt of non-financial listed companies with different debt‑to‑EBITDA ratios

Across regions, corporations, with the notable exception of Japan, witnessed an increase in leverage both measured as debt‑to‑assets and debt‑to‑EBITDA ratios (Figure 2.7). In terms of debt‑to‑assets ratio, all regions experienced a slight increase from 2005 to 2019, except for Japan where the debt‑to‑assets ratio decreased from 31% to 26%. Specifically, the United States and Europe have both seen an increase of 4 percentage points. The increase in leverage is even larger when measured with debt‑to‑EBITDA ratio, as most regions have seen an increase from around 2x to almost 3x. The largest increase took place in the People’s Republic of China (China) where this ratio increased from less than 2x to 3.5x. In the case of Japan, despite the dramatic surge to 4.5x during the 2008 financial crisis, the ratio returned to the pre‑crisis level in recent years.

Figure 2.7. Debt ratio of non‑financial listed companies, by country / region

Figure 2.8 shows leverage ratios across industries. Looking at the debt‑to‑assets ratio, all industries, except industrials, experienced an increase in leverage between 2005 and 2019. Likewise, when looking at leverage in terms of the debt‑to‑EBITDA ratio, all industries, except industrials, saw a larger increase in leverage. Utility companies experienced one of the highest increases in leverage, with a four percentage points increase in debt‑to‑assets ratio and with debt‑to‑EBITDA ratios increasing from 3.3x to 5.2x. Technology companies had the lowest leverage among all industries. However, their debt‑to‑assets ratio still increased by six percentage points without causing a similar increase in its debt‑to‑EBITDA ratio, owing to higher profitability ratios. A further analysis of technology companies also shows that these companies have the highest cash ratio, with more than 20% of total assets in cash or short‑term liquid investments. Reproducing the analysis with median ratios leads to parallel results.

Figure 2.8. Debt ratio of non‑financial listed companies, by industries

2.1.1. Corporate investment

A large share of total investment in most economies is made up by non‑financial corporations. However, non-financial companies’ investment growth has not picked up during the past decade. In the OECD as a whole, the investment ratio - measured as gross fixed capital formation by non‑financial companies to GDP - has gone from 11.0% in 2005 to 11.9% in 2019 (Figure 2.9, Panel A). In Japan and China, the last observed investment ratios were lower than in 2008, whilst in the United States it has remained almost unchanged. It is only during the last years that investment ratios have slightly begun to increase. Europe saw investment grow from 10.3% to 13.1% of GDP during the period from 2014 to 2019, and Japan saw a two percentage point increase from 13.9% to 16.2% over the same period. In the United States, investment picked up more quickly after the 2008 crisis, increasing from 8.5% in 2009 to 10.2% in 2014. Since then though it has remained more or less constant. In terms of the level of investment to GDP, China is a notable exception, showing a significantly higher investment ratio than other regions. Further, the Chinese case is unique because investment by non-financial companies increased throughout the 2008 crisis up until 2010 when it reached 31% of GDP, after which it has fluctuated, with a notable drop in 2018.

While few in number, publicly listed companies make up a large portion of non‑financial companies’ gross fixed capital formation. Indeed, listed corporations’ investment - measured as capital expenditure (Capex) over GDP - in OECD countries has been on average 4.4% since 2005 (Figure 2.9, Panel B). This amounts to about 40% of the non‑financial corporate sector’s total gross fixed capital formation. In Japan, investment in fixed capital by the listed segment after the 2008 financial crisis has grown faster than the economy at large, from 5.4% in 2010 to 7.4% in 2019. In Europe, investment in fixed capital by listed companies has been downward sloping since 2012. However, investment by all non‑financials companies has increased somewhat in the region, in particular since 2011. Investment in fixed capital by listed companies in the United States has increased slightly since 2017 while overall corporate investment has remained flat. In China, although the non-financial sector at large has invested at much higher rates - equivalent to 30% of its GDP - listed non‑financial companies contribute a small share to fixed capital formation compared to other countries. Further, their capital expenditure as a share of GDP has been decreasing, in particular since 2011.

Figure 2.9. Investment rates of non-financial listed companies

By looking at investment by non‑financial listed companies, it is also possible to separate measures of investment in research and development (R&D) from investments in fixed capital (Capex). Looking at non‑financial listed companies around the globe, investment as share of GDP has not changed significantly over the 2005‑2019 period. However, this masks large changes in the composition of investments. Specifically, investment in R&D has seen a significant increase that has been offset by declining capital expenditure. While Capex has decreased by 2.7%, R&D investments grew by over 35% as a share of GDP between 2005 and 2019 (Figure 2.10, Panel A). As a result, the share of R&D in total investment increased from 19% in 2005 to 24% in 2019 (Figure 2.10, Panel B). A similar trend can be observed when looking at investment as a share of sales and assets. While Capex has decreased as a share of both assets and sales, R&D increased, implying that R&D investments grew faster than both total sales and assets (Figure 2.10, Panels C and D).

Looking at these investment developments on a regional level, the trends differ markedly (Figure 2.11). For Capex, the trend has largely been flat in most regions. The notable exception is China where Capex as share of sales has declined from 13.4% to 4.8% from 2005 to 2019. The level of R&D investments has increased in all regions. China and the United States have seen the largest increases in R&D by listed companies. Europe has seen improvements in R&D investments since 2011. Similarly, after a sluggish period following the 2008 crisis, Japan has shown an upward trend in R&D after 2014.

Figure 2.10. Overview of corporate investment, global listed non‑financial companies

Figure 2.11. Corporate investment as a share of sales of non‑financial listed companies, by country

Significant differences in the type and level of investment can be observed when splitting companies according to their financial characteristics. Companies are first categorised by size (measured by assets), which shows that large companies invest more in Capex and less in R&D relative to small companies (Figure 2.12, Panels A and D). Further, this R&D investment gap between small and large firms has widened since 2016. When grouping companies by profitability levels - measured as the EBITDA margin - there are significant differences in both their R&D and Capex investments (Figure 2.12, Panels B and E). High profit companies invest over two times more in Capex and R&D compared to companies with low profits levels. This is in line with the assumption that companies prefer to finance investments with internally generated resources. Another corporate characteristic that influences investment patterns is the leverage level (Figure 2.12, Panels C and F). Notably, high leverage companies invest a larger share of their revenues in capital expenditure than low leverage firms do. Contrarily, low leverage firms devote a larger share of their investment to R&D compared to high leverage companies. This underlines that equity financing is more suited to finance riskier projects with uncertain outcomes, as represented by R&D investment. At the same time, it shows that investment in fixed capital can be pledged as collateral and so lends itself more easily to debt financing.

Figure 2.12. Corporate investment by firm characteristics

Investment patterns largely depend on the industry in which companies operate. Since 2005, companies in the telecommunications industry have devoted the largest share of their sales to investment on average, closely followed by utilities (Figure 2.13, Panel A). In 2019, these two industries had investment‑to‑sales ratios that were 4.5 percentage points higher than the third most investment intensive industry, which was healthcare. On aggregate, most industries have had relatively flat investment trends since 2005. Notably, energy has seen a drop from 14% in 2015 to below 9% in 2019 (Figure 2.13, Panel B).

Figure 2.13. Corporate investment, by industry

2.1.2. Short-termism and underinvestment

The corporate sector has sometimes been criticised for underinvesting in the period following the 2008 financial crisis. It has been argued that corporations have shown myopic behaviour by favouring short‑term results at the expense of long‑term productive investment. Such short‑term behaviour may for example be an effect of misaligned incentives between the company and its shareholders or the company and its executives through flawed remuneration structures. The issue is of importance since it relates to the development of the productive capacity of the economy at large.

The existing evidence is not conclusive on the question of whether sluggish investment is rooted in short‑termism. Haldane and Davies (2011) measure short‑termism as an excessive discount applied to investment projects. The study provides evidence of an increase in short‑termism over time based on that metric. Others, contrarily, have claimed that there is no convincing evidence in favour of the short‑termism hypothesis, pointing to the fact that sluggish capital expenditure - interpreted as a symptom of short‑termism - is a global trend and not just one in stock market dependent economies, and that R&D investment is still increasing (Haldane and Davies, 2011[1]) (Nathan and Goldberg, 2019[2]).

As shown above, globally, investment as a share of GDP by non‑financial companies has slightly grown, and R&D has significantly increased. However, it is not possible to say that this is evidence either for or against short‑termism. While investment has remained more or less constant or even increased in most regions in the preceding analysis, it should be emphasised that these figures refer only to listed companies, and that they reflect gross investment. However, there is evidence that depreciation rates have increased, with significantly lower growth of real business capital stock compared to pre‑2008 levels in many economies. Further, in a low‑growth environment, there is a risk that constant investment rates mask a low‑growth equilibrium where the levels remain constant only because both investment and the economy at large are growing slowly (ECB, 2018[3]). Other studies find evidence of underinvestment both in the Euro Area when measuring net investment as a share of GDP (Kalemli-Özcan, Laeven and Moreno, 2019[4]) and in the United States when comparing investment to corporate valuations and profitability (Gutiérrez and Philippon, 2016[5]). Finally, in a US context, studies have found that private companies invest less than public companies, particularly in R&D (Feldman et al., 2018[6]). This makes the sample composition of the figures presented here important.

To the extent that there is a problem of underinvestment, the question is what is driving it. Short‑termist pressure by shareholders is a possible explanation, but it is one among many others. The problem may also be an issue of, for example, a lack of access to adequate financing due to incomplete capital markets, a lack of competition which disincentivises investment, regulatory uncertainty or a debt overhang problem. Even when looking only at short‑termism, there are several possible causes, including the structure of executive compensation and shareholder incentives that are not conducive to investment, which may in turn be an effect of changed ownership structures. For example, the increasing presence of institutional investors as owners of listed companies, in particular those following passive investment strategies, risks lower monitoring and engagement with the investee company (De La Cruz, Medina and Tang, 2019[7]). There are also suggestions that a lack of competition may lead to underinvestment (Gutiérrez and Philippon, 2017[8]).

It is worth mentioning that a number of studies relate short‑termism and underinvestment specifically to corporate payouts. Some have defined short‑termism simply as increases in the ratio between corporate payouts (dividends and share buybacks) and revenues or net profits (EY and EC, 2020[9]). In a US context, owing to the prevalence of share buyback programmes, it is common to look at the effects of such operations on corporate investment (see e.g. (Lazonick, 2014[10]); (Almeida, Fos and Kronlund, 2016[11])). The empirical evidence for the relationship between payouts, revenues and investment for listed companies is addressed in greater detail under section 2.5 below.

2.1.3. Sources of debt financing

Financial systems are often classified as bank‑based or market‑based in relation to the main source that companies use to finance themselves. While the use of market‑based instruments such as corporate bonds increased over the past few decades, bank lending in the form of loans is still the major financing source for non‑financial corporations in most economies. As seen in Figure 2.14, non‑financial companies from the euro area, the United Kingdom and Japan rely heavily on loans while companies from the United States mostly use corporate bonds and other debt securities as a source of debt financing. By the end of 2019, loans corresponded to 88% and 85% of the total debt financing of non‑financial companies from euro area and Japan respectively, while only amounted to 35% of the total debt financing of the US non‑financial companies.

Until the 2008 financial crisis, many parts of the world experienced consistent economic growth, accompanied by a decrease in risk perception and an increase in the amount of liquidity. As a result, bank lending to non‑financial corporations experienced a gradual upward trend between 2000 and 2007 across regions, except in Japan. The annual net flow of loans to non‑financial corporations almost tripled in the United States and the United Kingdom, and increased 40% in the euro area during the same period (Figure 2.15). In contrast to these positive flows, Japanese non‑financial companies experienced negative net flows of loans between 2000 and 2004. However, in line with the overall economic and financial trends, the annual net flow of loans to Japanese non‑financial corporations improved after 2010 (Figure 2.15, Panel D). In response to the economic and financial turmoil accompanied by uncertainties about the borrower quality and contraction in the available funds, bank loan flows slowed down substantially in 2009 and/or 2010 across all regions. In addition, a second wave of corporate credit tightening occurred in the euro area following the 2012 sovereign debt crisis (Figure 2.15, Panel B).

Figure 2.14. Sources of non-financial corporate debt financing, as of end 2019

Following the 2008 financial crisis, banks increased their resilience by significantly strengthening their capital and liquidity buffers to comply with the stricter regulatory requirements that were enacted in response to the crisis. This was one of the reasons for the contraction in the bank lending following the 2008 financial crisis and resulted in an increase in the use of other alternative sources of financing, especially capital market instruments.

Figure 2.15. Evolution of loans and debt securities use by non‑financial corporations, annual net flows

2.2. Global trends in the use of public equity markets

Access to equity capital gives corporations the financial resilience that helps them overcome temporary downturns while still meeting their obligations to employees, creditors, bondholders and suppliers. During the 2008 financial crisis, for example, publicly listed non‑financial companies raised only in 2009 a historical record of USD 511 billion of new equity through the stock market in a time when bank credit suddenly became difficult to access, or vanished completely.

The scrutiny by equity markets also serves the critical function of allocating capital between long‑term viable businesses and companies that have structural weaknesses and limited prospects to survive. This function is particularly valuable in times of structural adjustments with possible long-term implications for the industrial structure, such as the current COVID‑19 crisis. By its long‑term nature and ability to engage in projects with uncertain outcomes, equity financing also contributes to innovation and business dynamics, which are the prerequisites for sustainable economic recovery and long‑term resilience. From the perspective of ordinary households, public equity markets provide an opportunity to directly or indirectly participate in the corporate value creation and additional options for managing savings and plan for retirement.

Today, there are almost 40 531 listed companies in the world with a combined market value of about USD 105 trillion. This also means that public equity is the largest segment of capital markets that is available to the general public. Since the mid‑1990s, the public equity market landscape has undergone some important changes. One important development has been an increased use of public equity markets by Asian companies. In the 1990s, European companies - mainly from the United Kingdom, Germany, France and Italy - dominated the global scene in terms of initial public offerings (IPOs) and accounted for 42% of all capital raised with almost 3 000 listings during the decade (Figure 2.16). Since then, European IPO activity has declined in both absolute and relative terms. And during the past decade leading up to the COVID‑19 crisis, the amount of public equity capital raised by European non‑financial companies was below both US and Chinese companies.

Between 2009 and 2019, 47% of all public equity in the world was raised by Asian companies. This is a marked increase from 22% during the 1990s. The growth of Asian markets is mainly the result of a surge in Chinese IPOs, which is shown separately in Figure 2.16. The number of Chinese IPOs more than tripled between the 1990s and the post‑2008 period, when they represented almost one‑third of the global proceeds. The Japanese market, which in 2000‑2008 experienced a relative decline in the total IPO proceeds with respect to the 1990s, saw a 32% increase during the 2009‑2019 period, which also contributed to the increased importance of Asian equity markets during the past decade.

As a result of the surge in IPOs, there has also been an increase in the global share of Asian listed companies. In the beginning of 2021, over half of the world’s listed companies were listed on Asian stock exchanges that together represented 32% of the market value of the world’s listed companies.

Figure 2.16. Initial public offerings (IPOs), total amount raised

The shift towards Asia has been even more pronounced with respect to the number of IPOs by non‑financial companies. As seen in Figure 2.17, Chinese non‑financial companies have been the world’s most frequent users of IPOs during the past decade, with about two and a half times as many IPOs as the United States. Moreover, other Asian markets - India, Japan, Korea and Hong Kong (China) - also rank among the top 10 IPO markets globally. Importantly, several Asian emerging markets, such as Indonesia, Thailand, Malaysia and Viet Nam, rank higher in terms of IPOs than most advanced economies. Among the EU member states, only Poland ranks among the top 10.

Figure 2.17. Top 20 jurisdictions by number of non‑financial company IPOs during past 10 years

The change in the global public equity market landscape has not only been driven by a shift in the number of new listings towards Asian markets. Another contributing factor is an increasing number of companies that have delisted from the stock markets outside of Asia. As noted above, since 2005, over 30 000 companies have delisted from the public stock market globally. In particular, there were almost 8 000 delistings of European companies over the 2005‑2019 period, over 5 000 delistings of US companies and around 1 300 of Japanese companies. For the United States and Europe, these delistings were larger than the number of new listings, resulting in a net decrease in listed companies every single year between 2008 and 2019 (Figure 2.18). In Japan on the other hand, net listings were positive in 9 out of the 15 years shown in Figure 2.18. In China, there were on average less than 30 delistings per year, resulting in a considerable net increase in the total number listed companies.

Figure 2.18. Newly listed and delisted companies

2.2.1. Growth companies’ use of public equity financing

The growth of Asian stock markets and the increased number of delistings in the United States and Europe are not the only features of global equity markets during the past decade. Another characteristic, described in Figure 2.19, is the decline in the listings of smaller growth companies in some advanced markets. Smaller growth companies are defined as those raising less than USD 100 million in an IPO. In the United States, for example, the portion of growth company listings was around 50% during the 2009‑2019 period compared to 77% during the 1995‑1999 period. A similar trend can be observed in Germany and to some extent in the United Kingdom. However, advanced markets in Asia - such as Hong Kong (China), Japan and Korea - have all seen an increase in the portion of growth company listings compared to the 1990s. In Hong Kong (China), Japan and Korea, 9 out of 10 IPOs in the past decade have been by growth companies. It is also important to note that China and India together hosted on average one‑third of the world’s growth company IPOs in the past five years.

Figure 2.19. Growth company IPOs’ share in the total number of IPOs by non‑financial companies

2.2.2. The industry composition of IPO financing

As mentioned above, public equity markets do not only serve the role of providing companies with long‑term capital. Another important function is to scrutinise the viability of different business propositions and to allocate equity capital between competing ends. This is a function that has been highlighted as an important policy objective, but also as a practical administrative challenge, for distributing public support to businesses in the current COVID‑19 crisis.

Figure 2.20 presents a breakdown of the total proceeds from IPOs across different industries between 2010 and 2019. While the financial sector has absorbed an important part of the IPO proceeds across all regions, there are some noteworthy differences with respect to the healthcare, technology and telecommunications industries (HTT). In the United States, 41% of all equity was raised by companies from the HTT industries with 17% going to healthcare and 23% going to technology companies. The Japanese HTT industries accounted for 34% of all IPO proceeds with a dominance of the telecommunications industry. Technology companies are also dominant within the HTT industries in China. Out of the 28% of IPO proceeds that went to the HTT industries, technology accounted for about two‑thirds and healthcare for a quarter. In Europe, the share of IPO proceeds that went to the HTT industries was about 19%, of which technology companies were the largest recipients, followed by healthcare and telecommunications companies.

In 2019, more than 200 technology companies worldwide raised a total amount of USD 50 billion, which equalled 27% of all proceeds from IPOs worldwide. The amount raised by technology companies in 2019 was fairly split between Chinese and US companies that accounted for 42% and 39%, respectively. Among the technology companies, the IPOs of the Chinese company Alibaba Group1 in Hong Kong (China) and the US companies Uber Technologies and Lyft Inc. rank among the top 10 of the largest IPOs in 2019.

Figure 2.20. IPO proceeds distribution by industry (share in total regional proceeds, 2010-2019)

2.2.3. Increased importance of secondary public offerings

Secondary public offerings (SPOs) allow companies that are already listed to continue raising equity capital on primary markets after their IPO. The proceeds from the SPO may be used for a variety of purposes and can also help fundamentally sound companies to bridge a temporary downturn in economic activity such as the crisis caused by the COVID‑19 pandemic. As mentioned in the introduction to this section, SPOs played an important role in providing the corporate sector with equity capital in the wake of the 2008 financial crisis.

The use of SPOs as a source of funding has gained momentum over the recent decades. The total proceeds raised between 2009 and 2019 worldwide amounted to USD 7.2 trillion, which is almost three times more than the amount raised through SPOs during the 1990s. The increase in the use of SPOs is true for all regions illustrated in Figure 2.21. In Europe and the United States - the dominant regions in terms of SPO volume - the proceeds doubled from 1990‑1999 to 2009‑2019. In Japan the use of SPOs for the last decade was two times higher than the 1990s. In China, the use of SPOs was marginal during the 1990s, however, in the past decade Chinese companies raised USD 1.15 trillion in equity through SPOs, equal to 16% of all equity raised in the world through SPOs during the period.

Figure 2.21. Secondary public offerings (SPOs), total amount raised

Typically, an SPO can be undertaken either by the company itself issuing new shares or when an existing owner offers a block of shares not previously considered as part of the free‑float. In the first case, the company will raise new additional equity, while the second case implies only ownership transfer. Figure 2.22 shows that new share issuances accounted for 60% of the total SPO proceeds globally before the 2008 financial crisis. During the recent decade, new shares represented about 50% of SPO proceeds in the United States and 40% in Europe. In both cases, the numbers represent a decrease compared with the period before the 2008 financial crisis. Importantly, during the 2008‑2009 period and across all regions, with the exception of China, at least 78% of the proceeds raised via SPOs were in the form of new share issuances. This was also the period, when a record amount of USD 1.7 trillion was raised through SPOs globally amidst the 2008 financial crisis.

Figure 2.22. New share issuances through SPOs, as a share of total amount raised

The steady growth of SPOs worldwide has also shifted the importance of public equity financing from IPOs to SPOs with respect to total funds raised. While in the 1990s, SPOs accounted for half of the proceeds raised in the public equity markets (IPOs and SPOs combined), in the last decade their share reached a historical amount of 75% of the total proceeds. In addition, as shown in Figure 2.23, whereas in regions as the United States and Europe saw a decreasing trend in the companies’ use of IPOs over time, there is an increasing use of SPOs instead. This together with a decrease in the listings of smaller growth companies discussed above may again raise the question if stock markets increasingly have become a source of equity funding for fewer but larger companies, sometimes using the proceeds from equity and corporate bond markets to acquire smaller growth companies to complement and further expand their operations.

Figure 2.23. IPOs and SPOs by non‑financial companies

2.3. Extended growth and record amounts of corporate bond borrowing

Compared to ordinary bank loans, corporate bonds typically have longer maturities and can be issued for a defined purpose. In addition the absence or relatively limited requirements for collateral gives corporate bond financing a special role as a source of financing compared to other types of borrowing.

The surge in the use of corporate bond financing during the past decade has also highlighted the role of corporate bonds in corporate governance. Covenants - clauses in a bond contract that are designed to protect bondholders against actions that issuers can take at their expense - have a strong influence on the governance of issuer companies. They range from specifying the conditions for dividend payments to obliging issuers to meet certain disclosure requirements. Moreover, by trading, bondholders also affect the cost of capital of the corporation, which indirectly or through actions by shareholders serve as a disciplining force on corporate behaviour. Bondholders and other creditors may also play a particularly active role during periods of financial distress and insolvency, which many corporations are facing as a result of the COVID‑19 crisis.

Figure 2.24 presents the total amount of proceeds that non‑financial companies received through corporate bond issues in each year over the past two decades. A common observation across all the panels is the significant and lasting increase in issuance in the aftermath of the 2008 financial crisis. Globally, annual corporate bond issuance doubled from an average of USD 890 billion before the 2008 financial crisis since 2000 to an average of USD 1.78 trillion in period between 2008 and 2019. Similarly, US non‑financial companies increased their annual issuance from a pre-2008 crisis average of USD 414 billion to an average of USD 699 billion in the post‑crisis period and European companies saw an increase from USD 257 billion to USD 398 billion.

A common observation across panels A to C of Figure 2.24 is the decline in corporate bond issuance in 2018, which happened in the second half of the year as a reaction to a move towards less accommodative monetary policies by major central banks across the globe. When these central banks later provided reassurance about their continued support to the market whenever necessary, corporate bond issuance re‑bounced in 2019.

Figure 2.24 in Panel D shows that annual issuances in Japan saw an increase to a degree similar to that observed in the United States and in Europe, moving from an annual average of USD 57 billion in the 2000‑2007 period to USD 80 billion in the subsequent period. Importantly, Japanese annual corporate bond issuances has been on a positive trend for the last 5 years reaching in 2019 USD 111 billion - twice the 2015 amount. Panel E of the same figure reflects that Chinese corporate bond issuance accelerated sharply in the past decade, starting from a negligible level prior to the 2008 financial crisis up to an annual average of USD 467 billion during the past 5 years, making Chinese companies the second largest issuers after US companies.

Figure 2.24. Corporate bond issuance by non‑financial companies, by country/region

2.3.1. Large outstanding stock of non‑financial corporate bonds

As a result of a decade‑long build‑up of corporate bond debt since the 2008 global financial crisis, the world entered the COVID‑19 crisis with a record level of USD 13.7 trillion in outstanding debt in the form of corporate bonds. Of this amount, USD 6.1 trillion was issued by US companies, USD 2.9 trillion by European companies, USD 1.9 trillion by Chinese companies and USD 0.5 trillion by companies in Japan. Together, these countries made up 84% of the global outstanding stock of corporate bonds.

Going into 2020 and the COVID‑19 crisis, corporate bond issuers also faced record levels of repayment and refinancing requirements. Panel B of Figure 2.25 presents the inflation‑adjusted outstanding amount of corporate bonds that needs to be paid back or refinanced within the subsequent three years. The real amounts due within the following three years have constantly increased since the 2008 global financial crisis and as of December 2019, non‑financial companies worldwide needed to pay back or refinance an unprecedented USD 1.3 trillion within one year, USD 2.9 trillion within two years and USD 4.4 trillion within three years. The amount due within three years as a percentage of the total outstanding amount also reached a 20‑year record high at 32.3% in 2019.

Figure 2.25. Outstanding amount of corporate bonds issued by non‑financial companies

2.3.2. Longer maturities for investment grade bonds but not for others

If a corporation can issue bonds with a longer maturity, it will help to extend its debt obligations, which may be particularly helpful in times of a temporary financial distress. The average maturity of corporate bonds at origination, could therefore be a good indicator of how long an average company with liquidity problems can sustain the pressure of refinancing its debt or when a distressed exchange of debt2 may occur.

Figure 2.26 shows that for issuances during the 2015‑2019 period, the average maturities at origination for investment grade bonds was 12.3 years, which is 3.6 years longer than the average maturities for bonds issued between 2000 and 2004. Although this lengthening undoubtedly gives more flexibility to investment grade issuers, longer maturities are also associated with higher price sensitivity to changes in interest rates.

For non‑investment grade and unrated bonds however, maturities have shortened. As reported in Figure 2.26, the average maturity for non‑investment grade bonds fell from 8.1 years in the early 2000s to 7.1 years in the past 5 years. Likewise, average maturity of unrated bonds was shortened from 6.4 to 5.1 years. The need to repay or refinance debt in shorter intervals could not only compromise the investment horizon for these companies that may still be relatively young and growing, but may also make it more difficult to survive temporary external shocks such as the COVID‑19 crisis that are threatening the financial viability of an otherwise viable business.

Figure 2.26. Corporate bond maturities by credit ratings

2.3.3. Long‑lasting decline in overall bond quality

An important feature of the current corporate bond market has been a persistently high share of non‑investment grade bonds. As reported in Figure 2.27, in each year from 2010 to 2019, with the exception of 2018, more than 20% of the total amount of all non‑financial corporate bond issues was non‑investment grade. In 2019, one quarter of all corporate bond issuances were non‑investment grade. Since the ratio of non‑investment grade to all corporate bond issuances is a commonly used proxy for overall bond market quality, it is important to note in Figure 2.27 that corporate bond markets experienced the longest period in the past 40 years that the non‑investment grade ratio remained this high before a significant increase in default rates.

Figure 2.27. Share of non‑investment grade bonds in global bond issuance by non‑financial companies and average default rates of rated companies

Another important development indicating that the COVID‑19 crisis was preceded by a long‑term decline in overall corporate bond quality is the increasing dominance of BBB bonds within the investment grade category. Figure 2.28 shows the rating composition of issuance in investment and non‑investment grade categories starting from 1990s. According to Panel A, the share of BBB rated bonds, which is the lowest quality of bonds that are included in the investment grade category, increased from an average of 38.9% over the 2000‑2007 period to an average of 44.6% in the 2008‑2019 period and trending upwards. In 2019, half of all issuance (50.8%) in the investment grade category had the lowest rating BBB.

Figure 2.28. Composition of issuance in investment and non‑investment grade categories

In the smaller non‑investment grade category, however, the shift was towards a larger portion of higher rated bonds. Specifically, the portion of BB rated bonds in the global non‑investment grade issuance averaged 35.2% before the 2008 global financial crisis and 50.1% during the 2008‑2019 period, with a peak of 58.4% in 2019.

Given these major shifts in intra‑category quality of investment and non‑investment grade corporate bonds a global corporate bond rating index is constructed to provide a measure of overall bond quality rating. This allows for a more refined approach than simply using the share of non‑investment grade bonds in total issuance shown in Figure 2.29.3 Based on information about all rated bonds that have been issued by non‑financial companies worldwide, the two panels of Figure 2.29 plot this overall quality index for each year since 1980 (Panel A) and for each month in the 3 years before the COVID‑19 crisis (Panel B).

According to the yearly data in Panel A, the lowest levels of issuer quality were reached in 1987, 1997, 2004 and 2010. In each of these years, the index reached a lower value than in the previous cycle, with a record low of 12.6 in 2010. Moreover, the number of years for which this index stayed under 14, which corresponds to a BBB+ rating, increased in each cycle. Notably, from the all‑time low in 2010 up to December 2019, the global corporate bond rating index has stayed below BBB+ for a full 10 years and remained at 13.1 in 2019. This means that in 2019, the average corporate bond issued had a rating of approximately BBB.

Figure 2.29. Global corporate bond rating index

A closer look at the 3‑year period from December 2016 to December 2019 in Panel B shows that in some months, the index actually moved very close to the BBB+ level. The improvement in the global corporate bond rating index observed in 2018, coincided with a period when the major central banks had become or were expected to become less accommodative. However, this trend in bond quality was reversed as soon as central banks, starting in January 2019, declared their readiness to re‑launch accommodative strategies as necessary. As a consequence, the index dropped throughout 2019, and at year‑end 2019 it was back to the 2017 level with an overall bond rating slightly above the non-investment grade category.

2.3.4. Corporate bonds versus syndicated loans

Companies that are in search of larger amounts of funds may obtain a syndicated loan where the lender is a group (syndicate) of banks rather than a single bank, which allows the participating banks to share the credit risk. Similar to corporate bonds, syndicated loans can also be traded on the secondary market, securitised and rated by independent rating agencies.

Figure 2.30 in Panel A shows the amount of capital that non‑financial corporations borrowed in the form of syndicated loans and raised by corporate bonds respectively over the period between 2000 and 2019. For the period as a whole, the annual average amount borrowed through syndicated loans was double the amount that of raised through corporate bonds. While the use of syndicated loans experienced a temporary decrease following the 2008 financial crisis, corporate bonds issuance continued its positive trend with a significant increase in 2009. The share of US borrowing in the syndicated loans market increased from 28% in 2007 and reached 52% of total borrowing in 2019. In the corporate bond market however, the share of proceeds in total raised by US firms declined to 36% of total proceeds in 2019 from 46% in 2007.

Figure 2.30. Syndicated loan and corporate bond financing of non‑financial corporations

Another observation derived from Panel B of the same figure is that the increased global share of proceeds from corporate bond issuances by non‑financial corporations from emerging markets has not been matched by an equivalent increase in the share of syndicated loans, which has remained stable at around 10% for the past decade.

While the asset allocation of most institutional investors in the corporate bond market has been driven by rating‑based investment mandates, lenders of syndicated loans are restricted by capital requirements. Figure 2.30 in Panel C shows the share of new issuance of non‑investment grade corporate bonds of all corporate bonds and the share of all syndicated loans that have a yield comparable to a non‑investment bond between 2000 and 2019.

Figure 2.30 in Panel D, provides a comparison between the average maturities for syndicated loans and corporate bonds between 2000 and 2019. Over the entire period, average maturities of corporate bonds have always been higher compared to that of syndicated loans. In 2019, the average maturity of corporate bonds of non‑financial corporations was 10 years with the corresponding figure for syndicated loans around 5 years.

2.4. Changes in the corporate ownership and the investor landscape

On‑going changes in the global equity market landscape and the functioning of capital markets have also translated into changes in the ownership structures of the world’s listed companies. These developments have important consequences for the premises on which corporate governance regulations are best designed and implemented. One of the most important developments in this respect is the increase in institutional ownership, which was analysed and addressed during the review of the 2015 G20/OECD Principles of Corporate Governance (OECD, 2015[13]). Since then, the use of indexed investment vehicles, for example exchange‑traded funds, has further nurtured the discussion about how the different business models and/or political dependence of large institutional investors influence their ability and incentives to exercise their ownership function. Another less recognised development is the increase in ownership concentration at the company level. While this is a global development, there are important country and regional differences with respect to the different categories of shareholders that make up the largest shareholders at the company level; differences that again have implications for the focus of regulatory considerations and priorities.

By the end of 2020, there were 40 531 listed companies in the world with a combined market value of USD 105 trillion. This section provides a global overview of how these companies are owned with respect to both the different categories of investors and the degree of ownership concentration at the company level. The findings build on firm‑level ownership information from almost 26 000 listed companies from 92 different markets. Together, these companies make up 98% of the global stock market value. Using the records of owners for each company, the investors were classified into 5 categories: private corporations, public sector, strategic individuals, institutional investors and other free‑float (see Annex for details); (De La Cruz, Medina and Tang, 2019[7]).

Panel A in Figure 2.31 shows the relative size of different markets with respect to capitalisation and the number of listed companies, while Panel B shows the distribution of shareholdings among the 5 different investor categories identified above. At global aggregate level, the largest investor category is institutional investors, which hold almost 43% of the world market capitalisation, followed by private corporations holding 11% and the public sector holding 10%. Strategic individuals rank 4^th owning 9% of the world’s listed equity. The remaining 27% free‑float is held by shareholders that do not reach the threshold for mandatory disclosure of their ownership records and retail investors that are not required to do so.

Figure 2.32 shows how the relative importance of the different investor categories varies across markets. Institutional investors is the most dominant category of investors in OECD countries holding at least 54% of the equity and with some of the unreported free‑float also likely to be held by institutions. Notably, in the United States, institutional investors is by far the most dominant category of investors holding at least 68% of the equity. Institutional investors is also the single largest category in Europe and Japan. In China, institutional investors is the smallest category, holding 11% of the market capitalisation. Instead, the largest investor category in China is the public sector, which holds 29% of all shares. The public sector is also a significant owner in the rest of the world with a 24% ownership. Listed companies in Japan, the rest of the world and Europe also have a significant portion of their shares held by other corporations. This is particularly pronounced in Japan where corporations hold 22% of market capitalisation. Together with engagement by strategic individuals, these data seem to confirm the presence of private corporations and holding companies as an important category of owners in listed companies and in many cases also the presence of group structures.

Figure 2.31. Universe of listed companies and investors’ holdings, as of end 2020

Figure 2.32. Ownership landscape, as percentage of total ownership by market, as of end 2020

2.4.1. The prevalence of concentrated ownership

The degree of ownership concentration in an individual company is not only of importance to the relationship between owners and managers. It may require additional focus on the relationship between controlling owners and non‑controlling owners. Contrary to what has been seen as received wisdom in the much of the corporate governance debate, the ownership structure in most markets is today characterised by a fairly high degree of concentration at the company level. But as indicated already in Figure 2.32 above, there are indeed important differences with respect to the categories of owners that make up the largest owners.

Figure 2.33 shows the share of companies with different levels of ownership for the three largest shareholders at the company level. The first panel shows that in 28% of the world’s listed companies, the three largest shareholders together hold between 10 and 29% of the equity. In 29% of the listed companies the three largest shareholders hold between 30‑49% and in 42% of the world companies, the largest three shareholders hold more than 50% of the equity. In only 0.6% of the world’s listed companies the three largest shareholders own a total of less than 10%.

Figure 2.33. Average ownership share of the 3 largest owners, as of end 2020

The pattern of concentration differs quite significantly across markets. In the United States for example, the three largest owners hold between 10 to 29% of the equity in more than half of the listed companies (57%) while they exceed 50% in just 15% of the companies. A similar but less pronounced pattern can also be seen in Japan. In Europe and to some extent in China, however the pattern is somewhat reversed. In Europe the three largest owners hold between 10 to 29% of the equity in 28% of the companies (China 12%) and over 50% in 42% of the listed companies (China 51%). The world distribution is largely influenced by the distribution in Asian companies as they represent 54% of the world’s listed companies.

2.4.2. The role of institutional investors as owners

As recognised in the 2015 G20/OECD Principles of Corporate Governance, individual investors have predominantly come to participate in the stock market through intermediary investors, such as pension funds and/or via pooled investment vehicles such as mutual funds (OECD, 2015[13]). This change in the way of saving and investing has led to the rise of institutional investors and turned them into important owners in many companies around the world. One reason for this is the advantages that come from pooling capital into large diversified portfolios that can take advantage of economies of scale and enhance the risk‑return relationship at relatively low cost for the individual. But in some markets, the development has also been influenced by regulatory changes. One such factor driving the growth of institutional investors has been the transition of pension systems from pay‑as‑you‑go to funded pension plans, leading to rapid growth of both privately and publicly managed pension funds. In 2019 pension funds and all retirement vehicles in the OECD held USD 32.3 trillion of assets under management, which is 60.1% of OECD GDP (OECD, 2019[14]).

The overall result of this development has been a longer and more complex investment chain between the individual household and the listed company. This includes increased intricacy with respect to cross‑investments between institutional investors, an increase in advisory services, index providers, and frequent outsourcing of ownership and asset management functions to sometimes multiple layers of businesses. The increased holdings by institutional investors also raise concerns that they might not have enough incentives to promote competition in competing investee companies (OECD, 2017[15]). In this new ownership landscape, it can sometimes be difficult to identify and allocate the responsibility for assuming the ownership functions in the best interest of the ultimate beneficiary. Particularly since active and informed ownership requires significant resources that profit maximising institutions and asset managers may be reluctant to carry. Certain institutions may also be under arbitrary direct or indirect political pressure to carry out their ownership functions in a manner that, from a financial standpoint, is not in the interest of the ultimate beneficiaries.

As shown in Panel B of Figure 2.31 above, institutional investors is the largest category of investor holding 43% or USD 44 trillion of the global market capitalisation. Despite their growth at the global level, Figure 2.32 also showed that their portion of ownership varies across different markets ranging from 68% of all holdings in the United States to about 11% in China. Figure 2.34 shows the relative importance of domestic and foreign institutional investors in different markets as well as the importance of institutional investors for ownership concentration at the company level. In the United States about 83% of all institutional ownership is held by domestic institutions. This may to a large extent be explained by the fact that the world’s largest asset managers are US‑based and that US stock markets represent the highest share in most investable indices, e.g. the United States represents around 67% in the MSCI World Index.

In Europe and Japan where institutional investors hold between 30% and 40% of the listed equity the distribution between domestic and foreign institutional ownership is more balanced. For instance, in Japan, around half of the institutional investors’ holdings correspond to foreign holdings whilst in Europe foreign institutional investors hold 41%. It is worth noting that for OECD countries and Europe intra‑regional investments are considered domestic. Hence, under this definition, a German Pension fund investing in a French listed company is considered a domestic investor. There are some markets that show a much lower presence of institutional investors, such as China and the rest of the world. However, whereas in China the share of foreign investors is only 28% of the total institutional investments, in the rest of the world, foreign institutions account for about 70% of all institutional investments.

Figure 2.34. Institutional investors’ ownership, as of end 2020

To highlight the importance of institutional investors on the ownership structure at the company level, Panel B in Figure 2.34 shows the average combined holdings of the largest 3, 10 and 20 institutional investors at the company level in each market. In China and the rest of the world the holdings of the largest 20 institutional investors, on average, do not surpass 10% of the listed equity at the company level. In Japan, the average combined holdings of the three largest institutional investors is 8%. In Europe the average combined holdings of the 3 largest institutional owners is 16%. Notably, in the United States the top 3 (20) largest institutional investors own on average 24% (47%) of the equity in US listed companies.

2.4.3. The role of governments as owners

The public sector is an important owner in listed companies in several markets. In many of these markets, in their privatisation efforts governments have been left with significant stakes in listed companies. Public sector ownership refers here to investments by central and regional governments, public pension funds, SOEs and SWFs. Overall, the public sector owns USD 10.73 trillion of listed equity, which amounts to 10% of the global market capitalisation. Chinese listed companies show the largest presence of public sector owners, where the public sector holds 29% of the listed equity. The public sector is also an important investor in the rest of the world. Notably, most of these public sector investments are domestic.

Figure 2.35. Public sector ownership, as of end 2020

	Public investor country / region
Investee company country / region	Europe	United States	Japan	China	Others
Europe	56.9%	3.2%	4.1%	0.6%	2.9%
United States	26.4%	95.6%	1.7%	0.1%	1.5%
Japan	5.2%	0.0%	94.1%	0.0%	0.1%
China	1.3%	0.0%	0.0%	88.3%	0.5%
Others	10.4%	1.2%	0.0%	11.0%	95.0%
Public investors’ portfolio (USD trillion)	1.75	0.61	0.13	3.99	4.25

Notes: Others refer to the 92 markets included in the universe excluding Europe, United States, Japan and China.

Source: OECD Capital Market Series dataset, FactSet, Thomson Reuters Eikon, Bloomberg, see Annex for details.

From the investor perspective, the largest public sector investor is China, which accounts for 37% of all public sector investment in listed equity (Figure 2.35, Panel B). The Chinese public sector is not only a large owner in the domestic market, but also in other markets. In fact, 11% of its portfolio is invested in other, mostly Asian, markets (Table 2.2). Europe, which is the second largest public sector investor, has about 57% of its portfolio invested domestically and 26% in the United States.

2.5. Trends in dividends and share buybacks

Since 2005, the average ratio of total payouts (dividends and buybacks) to revenue globally for those companies distributing payouts has been 3.3%, reaching 4.4% in 2019. Although payments through dividends still make up the majority of total payouts, share buybacks have increased in importance in recent years. Notably, in response to the 2018 corporate tax reform in the United States the amount spent on share buybacks increased significantly. As a result, in 2018 share buybacks made up 39.3% of total payouts globally, compared to an average of 23.2% during the 2005‑2019 period. Of the total value of share buybacks in 2018, approximately 83% was attributable to US corporations. In 2019, total share buybacks in the OECD countries amounted to USD 599 billion, over twice the amount of new equity issuance (IPO and SPO) on the corresponding exchanges. The amount spent on share buybacks has exceeded the amount of equity raised through IPOs and SPOs in OECD countries in 5 of the 15 years since 2005. This happened in 2007 and in every year from 2016‑2019.

Figure 2.36. Payout developments for non‑financial corporations globally

However, when looking at the number of companies doing share buybacks as a portion of the total number of non‑financial companies, it was generally lower in the period following the 2008 crisis than in the earlier years. However, in 2018 and 2019 the share passed its pre‑crisis peak. Dividends, on the other hand, have grown more evenly over the period, in particular since 2012, reaching 56% of companies in 2019 (Figure 2.37, Panel A). The fact that dividend policies are typically considered more permanent commitments than share buyback programmes is reflected in the much higher year‑on‑year volatility in the number of companies doing buybacks as compared to the change in companies paying dividends (Figure 2.37, Panel B).

Figure 2.37. Changes in total number of companies doing payouts

As seen in Figure 2.38, share buybacks constitute a fairly modest portion of total payouts in most regions other than the United States and to some extent in Japan over the recent years. Notably, even though dividends still make up the largest share of payouts around the world, the average share of buybacks in total payouts during the past 3 years was higher than the historical average of the 2005‑2019 period in all regions except for the rest of the world category. Further, most countries have seen a steady increase in the amount of total payouts during the last 10 years.

Figure 2.38. Payouts by non-financial companies

As is clear from the previous two figures, share buybacks are more volatile than dividends both in terms of the number of companies doing them and in terms of annual amounts. Plausibly, some of the observed differences and sudden changes over time in buybacks can be attributed to the regulatory framework. One example is the surge in US share buybacks following the 2018 tax reform which provided a tax holiday for US companies that repatriated cash from overseas. Another example is the new buyback rules that were introduced in Japan in 2003 and which led to a surge in the amount of shares repurchased the same year.

One important difference with respect to firm characteristics and payouts is company size. As seen in Figure 2.39, larger firms typically spend relatively more on payouts to their shareholders as a share of revenues than smaller firms do. On average, large listed companies paid out funds equivalent of 8.8% of their revenues annually between 2005 and 2019. The corresponding figure for small firms was 4.9%.

Figure 2.39. Payouts by large and small non‑financial companies

2.5.1. Payouts and corporate investment

A much debated issue is whether shareholder payouts are made at the expense of new productive investment. In reality, when splitting companies by investment intensity and looking at payouts as a share of revenues, the data indicate that most of the firms that spend relatively more on payouts are also the most investment‑intensive firms. On average since 2005, investment‑intensive companies spent the equivalent of 4.8% of their revenues on payouts, compared to 2.5% for firms that invest less. In 2019, investment‑intensive companies spent more than twice as much of their revenues on payouts as low‑investment companies (Figure 2.40, Panel A). The issue of corporate investment and payouts has been particularly controversial when it comes to share buybacks. Panel B of Figure 2.40 therefore shows the same data specifically for buyback companies. The results are similar, investment‑intensive companies on average spent the equivalent of 6.6% of their revenues on buybacks between 2005 and 2019, compared to 4.1% for firms that invest less.

Figure 2.40. Payouts by non‑financial companies, by investment intensity

The general picture shown in Figure 2.40 is also true at the industry level. The industries in which companies spend the most on payouts typically also rank high in terms of investment spending. Table 2.3 shows how the nine industries covered in this analysis rank in terms of amounts spent on payouts and investment as a share of revenues between 2005 and 2019.

Economic sector	Rank payouts	Rank investment
Telecommunications	1	2
Healthcare	2	4
Technology	3	3
Utilities	4	1
Basic materials	5	6
Energy	6	5
Consumer non-cyclicals	7	9
Industrials	8	8
Consumer cyclicals	9	7

Note: Payouts are measured as the amount spend on distributing dividends, undertaking buybacks, or both, as s share of revenues. Investment is also measured as a share of revenues.

Source: OECD Capital Market Series dataset, Bloomberg, see Annex for details.

Figure 2.41 offers a more detailed way of looking at the link between payouts and investment at the industry level. It plots the investment ranking of the industry that ranked highest in terms of payouts the same year. Panel A is based on absolute amounts whereas Panel B uses payouts and investment as shares of revenues. Looking at absolute numbers, the industry which spent the most on payouts was also the one that spent the most on investment in 9 of the 15 years between 2005 and 2019. It was either first or second in 12 and among the top 3 in as much as 14 of the 15 years covered in the analysis. The corresponding figures when using investment and payouts as shares of revenues are 3, 9 and 12 of 15 years, respectively. Taken together, the empirical analysis does not confirm that payouts necessarily come at the expense of investment intensity. An alternative explanation that may follow is that companies that already have a high investment intensity are facing a decline in marginal returns and that the shareholders prefer to receive and reallocate the abundant free cash flow to investments in other ventures with higher potential returns.

Figure 2.41. Investment ranking for the industry with the highest payout ranking

The analysis thus far has been constrained to company payouts. While it shows that most of the firms that spend relatively more on payouts are also the most investment‑intensive firms, it may be argued that in an alternative scenario where they did not spend any money on payouts, their investments would have been even higher. Since such a counterfactual cannot be observed, it is not possible to test this argument. However, it is possible to compare the investment levels of companies doing payouts to those not doing any payouts at all. Figure 2.42 shows the median level of investment as a share of revenues for payout companies and non‑payout companies. There was effectively no difference up until 2012, after which a slight divergence can be observed. The gap has remained more or less constant since then, indicating that the median payout company has devoted moderately more of its revenues to investment than the median non‑payout company.

Figure 2.42. Investment as a share of revenues, by company groups

However, taking a more detailed approach reveals relatively sharp differences in distributions across the two groups. While the median payout company spends relatively more on investment than the median non‑payout company, the opposite is true for higher percentile groups, particularly the 90^th percentile. Non payout companies at the right hand side of the tail of the distribution seem to be devoting a significantly larger share of their revenues to investment than the same group of payout companies (Figure 2.43). The high‑percentile groups drive the aggregate figures, so that when comparing the aggregate share of investment to revenues between payout companies and non‑payout companies (as Figure 2.42 does for median numbers), the latter category has a higher share in recent years.

Figure 2.43. Investment as a share of revenues, by company groups and percentiles

A point which bears mentioning that a common metric for looking at the extent to which companies use their earnings for payouts, the payout ratio - defined as buybacks and dividends as a share of net income - may give a distorted view of the trade‑off between payouts and investment. The reason for this distortion is twofold. Firstly, regarding the denominator, net income has already deducted some investment spending (R&D), meaning the payout ratio gives a share of earnings from which some critical investments have already been deducted, thus concealing the actual total amount spent on investment. Even a firm that has a 100% payout ratio may have made investments. Secondly, regarding the numerator, the sum of dividends and buybacks is a gross number since it does not adjust for new direct and indirect equity injections. When adjusting for these two factors, the payout ratio for S&P500 companies between 2007 and 2016 is reduced significantly, from 96% of net income to 41% (Fried and Wang, 2019[16]).

It is sometimes argued that managers in markets of which a large portion of executive compensation is directly linked to earnings per share (EPS) are more likely to engage in share buyback operations. Some studies have suggested that EPS considerations may indeed impact the timing of a share buyback, but that the actual level is driven by earnings.

2.5.2. Monetary policy, corporate debt and share buybacks

Developments with respect to share buybacks cannot be decoupled from monetary policy. This link is particularly important in the current low interest environment, which greatly affects the relative cost of debt and equity. The higher the cost of equity compared to debt, the greater the incentive for a company to reduce its equity base. In addition, low interest rates may drive increases in corporate debt issuance as a way to finance share buybacks (as opposed to using earnings). Indeed, the increase in share buybacks in recent years follows the increase in corporate bond issuances, which in turn has been supported by lower costs of debt. Expansionary monetary policy initiatives such as the ones undertaken in many OECD countries after the 2008 financial crisis and the COVID‑19 pandemic may directly affect developments in payout policy and adjustments in the companies’ capital structures.

It is worth noting that even if this is the case at the firm level, depending on how the sellers of the shares reallocate the proceeds, share buybacks need not necessarily decrease investment and employment spending at a macro level. Still, debt‑financed share buybacks may be driving increasing leverage in the economy, potentially posing a threat to financial stability. Indeed, the share of corporate bonds that disclose share buybacks or dividends among their intended uses has increased considerably since the 2008 financial crisis. Figure 2.44 reports this share both as a percentage of the total number of bond issues and as a percentage of the total amount issued, separately for the two categories of investment and non‑investment grade bonds. According to Panel A, in the early 2000s, less than 2% of investment grade bonds were intended to be used for dividends or buybacks. After a strong increase prior to the 2008 financial crisis and a decline back to negligible levels during the crisis, the share of payout‑related investment grade issues increased again in the post‑2008 period. Over the past 5 years, payout‑related bonds constituted, on average, 14% of total investment grade issuance and 12% of the total number of investment grade bonds. According to Panel B, a similar path was followed in the non‑investment grade category, although at lower levels. Over the 2015‑2019 period, payout‑related non‑investment grade issuance constituted, on average, 11% of total non‑investment grade issuance and 10% of the total number of non‑investment grade bonds. As a result, in the past 5 years, payout‑related investment and non‑investment grade bonds reached a total amount of USD 464 billion and USD 117 billion, respectively.

Figure 2.44. Share of corporate bonds intended for dividend and share buyback financing

Another development in the corporate bond market is a decline in the use of dividend‑ and share buyback‑related restrictions in bond contracts. Figure 2.45 reports the percentage of bond issues with covenants that restrict issuers’ payments to shareholders in the form of dividends and share buybacks. According to Panel A, such covenants have always been rare in the investment grade category and in recent years they have almost disappeared. On the other hand, Panel B indicates that dividend and share buyback restrictions were important components of bondholder protection in the non-investment grade category in early 2000s. Over the 2000‑2004 period, on average, 81% of non‑investment grade corporate bond issues had a dividend restriction and 88% had a share buyback restriction. In contrast, over the 2015‑2019 period, dividend‑ and share buyback‑related covenants were present in 44% and 50% of non‑investment grade bonds, respectively.

Figure 2.45. Share of corporate bonds with covenants restricting payouts

References

[11] Almeida, H., V. Fos and M. Kronlund (2016), “The real effect of share repurchases”, Journal of Financial Economics, Vol. 119/1, pp. 168-185.

[7] De La Cruz, A., A. Medina and Y. Tang (2019), “Owners of the World’s Listed Companies”, OECD Capital Market Series, Paris, http://www.oecd.org/corporate/Owners-of-the-Worlds-Listed-Companies.htm.

[3] ECB (2018), “Business investment in EU countries”, Occasional Paper Series - Working Group on Econometric Modelling, No. 2015, October 2018, http://www.ecb.europa.eu/pub/pdf/scpops/ecb.op215.en.pdf.

[9] EY and EC (2020), “Study on directors’ duties and sustainable corporate governance”, https://op.europa.eu/en/publication-detail/-/publication/e47928a2-d20b-11ea-adf7-01aa75ed71a1/language-en.

[6] Feldman, N. et al. (2018), “The Long and Short of It: Do Public and Private Firms Invest Differently?”, Federal Reserve Board Finance and Economics Discussion Series, http://www.federalreserve.gov/econres/feds/files/2018068pap.pdf.

[16] Fried, J. and J. Wang (2019), “Short-Termism and Capital Flows”, The Review of Corporate Finance Studies, Vol. 8(1), pp. 207-233.

[8] Gutiérrez, G. and T. Philippon (2017), “Declining Competition and Investment in the U.S.”, NBER Working Paper Series, http://www.nber.org/system/files/working_papers/w23583/w23583.pdf.

[5] Gutiérrez, G. and T. Philippon (2016), “Investment-less Growth: An Empirical Investigation”, NBER Working Paper Series, http://www.nber.org/system/files/working_papers/w22897/w22897.pdf.

[1] Haldane, A. and R. Davies (2011), “The short long”, Speech at the 29th Société Universitaire Européene de Recherches Financières Colloquium on ’New Paradigms in Money and Finance?, http://www.bis.org/review/r110511e.pdf.

[4] Kalemli-Özcan, S., L. Laeven and D. Moreno (2019), “Debt Overhang, Rollover Risk, and Corporate Investment: Evidence from the European Crisis”, ECB, Working Paper Series No: 2241, February 2019, http://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2241~cbea165b30.en.pdf.

[10] Lazonick, W. (2014), “Profits Without Prosperity”, Harvard Business Review, https://hbr.org/2014/09/profits-without-prosperity.

[12] MIS (2020), “Past recessions indicate potential paths for default rate in current downturn”, 26 August 2020, Moody’s Investors Service, New York.

[2] Nathan, C. and K. Goldberg (2019), “The Short-Termism Thesis: Dogma vs. Reality”, Harvard Law School Forum on Corporate Governance, https://corpgov.law.harvard.edu/2019/03/18/the-short-termism-thesis-dogma-vs-reality/.

[14] OECD (2019), “Pension Markets in Focus”, http://www.oecd.org/daf/fin/private-pensions/pensionmarketsinfocus.htm.

[15] OECD (2017), “Common Ownership by Institutional Investors and its Impact on Competition”, https://one.oecd.org/document/DAF/COMP(2017)10/en/pdf.

[13] OECD (2015), “G20/OECD Principles of Corporate Governance”, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264236882-en.

Notes

← 1. Alibaba Group IPO in Hong Kong (China) is a secondary listing as the company was already listed in the United States.

← 2. According to Moody's a distressed exchange occurs when a distressed company offers “creditors new or restructured debt, or a new package of securities, cash or assets, that amounts to a diminished financial obligation relative to the original obligation.”

← 3. The index assigns a score of 1 to a bond if it has the lowest credit quality rating and 21 if it has the highest rating. The corporate bond rating index is then calculated by taking a weighted average of individual bond scores, using issue amounts as weights.

Featured topics

Agriculture and fisheries

Climate change

Development

Digital

Economy

Education and skills

Employment

Environment

Finance and investment

Governance

Health

Industry, business and entrepreneurship

Regional, rural and urban development

Science, technology and innovation

Society

Taxation

Trade

Energy

Nuclear energy

Transport

Featured topics

Agriculture and fisheries

Climate change

Development

Digital

Economy

Education and skills

Employment

Environment

Finance and investment

Governance

Health

Industry, business and entrepreneurship

Regional, rural and urban development

Science, technology and innovation

Society

Taxation

Trade

Energy

Nuclear energy

Transport

Countries A - C

Countries D - I

Countries J - M

Countries N - R

Countries S - T

Countries U - Z

Regional and global engagement

Countries

Countries A - C

Countries D - I

Countries J - M

Countries N - R

Countries S - T

Countries U - Z

Regional and global engagement

Publications

Publications

Featured publications

Data

Data

Featured data

News & Events

News & Events

Featured Events

About OECD

About

Engage with us

Work with us

Featured topics

Agriculture and fisheries

Climate change

Development

Digital

Economy

Education and skills

Employment

Environment

Finance and investment