Economic and financial structure: which one prevails?

Economic and financial structure: a positive link

Empirical studies provide evidence of a positive link between the functioning of the financial system and economic growth.. While the majority of published research focuses on the link between financial system development and economic growth, gaining a sufficient understanding of the emergence, development, and economic implications of different financial structures across countries or organisations can be challenging.

For example, At a macro level, the real economic structure determines the shape of the financial system.. The results confirm that:

• A bank-based system is more likely to emerge in countries with many fixed-asset-heavy companies.
• Conversely, in countries with knowledge-based and intangible asset-based companies, a market-based financial system tends to evolve.

These results suggest that the structure of the real economy can determine the structure of the financial system.

What happens in companies regarding the relationship between economic and financial structure?

It might be thought that the reason for this link is that the financial system simply anticipates the development of the economy's financial needs and develops accordingly.

However, the structure of the real economy can lead to the development of certain characteristics of the financial system, because the main forces that determine the composition of the economy are external to finance, such as a country's geographic attributes (available natural resources and location, particularly) or its industrial policies, among others.

Like the capital structure, the financial structure of a business is divided into:

• The amount of the company's cash flow that is allocated to creditors.
• The amount going to shareholders.

Every company has a different mix, depending on their needs and expenses. Therefore, each company has its own debt-to-equity ratio. For example, an organisation might issue bonds and use the proceeds to buy shares, or it might issue shares and use the proceeds to pay off its debt.

When discussing economic and financial structure, it is also relevant to compare the latter with capital structure..

While a capital structure and a financial structure include information about long-term financing and common stock, preferred stock, and retained earnings, they do not provide any Information on short-term debt obligations.

A financial structure includes both short-term and long-term obligations in its calculation. In this sense, capital structure can be seen as a subset of financial structure that is more oriented towards long-term analysis, whereas The financial structure provides more reliable information regarding the current circumstances of the business.