Furthermore the average inflation rates are generally

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Furthermore, the average inflation rates are generally greater than in the United States, except for those in Malaysia and Thailand. The reason aggregate growth rates are important is that economic growth, from the gross national product identity, drives aggregate expenditure. Assuming the sample firms are representative of economic activity in each country, companies in high-growth economies are faced with high sales growth rates and the financial constraints discussed by Higgins (1981). Gordon (1962) shows that each firm s sustainable growth rate can be approximated as the product of the firm s return on equity (ROE) and its retention rate (1 the dividend payout). If firms grow faster than this sustainable growth rate, their financial policies have to change, or they have to raise external equity. For our sample, the sustainable growth rate is less than the nominal GDP growth rate for the median firm in every emerging market country except Pakistan. In contrast, the U.S. median firm s sustainable growth rate is 8.97%, greater than the nominal GDP growth rate of 7.60%. For seven of these eight emerging mar- ket countries, there seems to be growth pressures on the median firm. This im- plies these companies have greater external financing needs than equivalent U.S. firms. Table 2 provides a classification of the firms in the emerging market sample in terms of their financial development and financial orientation. The countries are classified based on stock market development, banking system development, corporate governance, investor and creditor protection, accounting standards, legal system, and level of corruption. 1 Jordan, Pakistan, Zimbabwe, and India are classified as bank oriented be- cause their equity markets were poorly developed during this period. Similarly, Korea and Malaysia are classified as market oriented because these countries had accounting systems and investor-protection regulations in place. Based on weak 1 For more details, please refer to a previous version of this article, available at . utoronto.ca/ booth.
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374 The Journal of Financial Research TABLE 1. Basic Economic Variables and Sustainable Growth Rates. Retention Return on Sustainable Real GDP Growth Inflation Rate Nominal Growth Rate a,b Equity a (percent) Growth c (percent) 1981 1990 d (percent) 1981 1990 e (percent) 1981 1990 (percent) South Korea 0.67 0.08 5.4 9.85 6.39 16.88 India 0.70 0.15 10.5 6.05 8.87 15.46 Malaysia 0.60 0.07 4.2 5.21 3.24 8.62 Thailand 0.56 0.15 8.4 7.98 4.43 12.77 Zimbabwe 0.64 0.13 8.32 5.77 14.00 20.58 Jordan 0.56 0.08 4.48 1.37 7.52 8.99 Pakistan 1.00 0.19 19 6.45 6.97 13.87 Turkey 0.38 0.22 8.36 5.15 46.28 53.81 United States 0.69 0.13 8.97 2.73 4.74 7.60 a Using the medians presented in Table 3. b The retention rate is the earnings per share minus the dividend per share divided by the earnings per share, using the median ratios presented in Table 3. c Gordon sustainable growth rate calculated as the retention rate times the return on equity.
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