Financing strategy from the view of corporate investment in Hungary

This research is trying to reveal which financing strategies characterized Hungarian companies in the last two decades: whether the development of the financial intermediary system or foreign direct investment (FDI) was the primary source of financing in corporate investments.

In the model of MM's assuming a perfect capital market and a tax-free competitive economy financing decisions are irrelevant and can be separated from investment decisions. In practice, however - due to market imperfections - corporate capital structure and financing decisions play a very decisive role in shaping the company's value. Conversion of corporate capital structure is not only a matter of internal decisions. There are also several external factors involved, so it is affected basically by the development of the capital market.

Apart from microeconomic and macroeconomic inquiry into potential advantages and disadvantages of financing alternatives, I would like to give an overview of the financing strategy typical of Hungarian companies in the last 25 years through an empirical analysis. The database of Hungarian enterprises contains the first 5000 firms with the highest revenue in the country between 1992 and 2013. The records include all relevant information from annual reports. I differentiate among the companies according to their ownership, size and sectors. The study analyzes the capital structure of firms in Hungary by financial indicators and the dynamism of the investments in a regression model.

As a result of this analysis we expect that the role of credits in the financing of Hungarian companies was not significant in the 1990s, and did not become dominant even after the credit expansion after 2000. But the rate of indebtedness of foreign companies was higher than that of Hungarian companies, which was mainly attributable to loans granted by mother companies which are part of FDI volume. As of 2000 the extent of reinvestment showed a uniform trend in the financing strategy of Hungarian companies, irrespective of the ownership structure, but it dropped radically after the crisis. Throughout the whole period in question, the financial strategy of foreign owned companies was more effective thanthe strategy of Hungarian owned ones.

JEL: F, G