The capital structure and financing of the construction industry

This study looks into the capital structure and financing of the construction industry both in the aggregate and at firm level, a subject which has received little attention. The importance of the industry in the national economy requires a better under-standing of the recourse to the various sources of funds and the different uses to which these are allocated - and determination whether or not growth prospects are inhibited by unavailability of finance.It is argued that concentration of the industry into fewer and larger units is proceeding at an accelerating rate, certain conditions and changes in attitudes favouring this. The financing of large firms therefore receives more attention. Size and rate growth are the characteristics of firms that are used in exploring for relationships with patterns of recourse and uses of funds. Some relationships are suggested. The study suggests that, on balance, quoted firms did not find growth constrained by a lack of finance. Also, that leeway exists for greater tapping of the capital market and for more trade credit taking. Trade credit taking and giving are related to turnover and a detailed study shows the "industrial" nature of these. Bank borrowing is studied in relation to size and growth rate, only vague relationships being found. Poor correlation between levels of over-drafts and other debentures on the one hand and the amount of avail-able security on the other indicates that characteristics of a more intangible nature weigh heavily in lenders' decisions. A closer look at the prospects of raising money from the capital market shows that there is no one-way investor prejudice against construction shares. New entrants to the quoted sector also demonstrate the possibilities of faster growth afforded by a quotation and that recourse to the market is not the rare event it is frequently thought to be. A limited survey of the smaller firms in the industry, some case studies being presented, tends to indicate that the finance constraint is overshadowed by a lack of ambition or lack of incentive, this arising from an inability to improve competitive position, given the dependence on open tendering to obtain the bulk of the work. It is suggested that bank borrowing and trade credit taking will be expanded, but that the biggest change will lie in the greater reliance on the capital market as a source of funds in the future.