Foreign holdings of U.S. Treasuries and U.S. Treasury yields

Foreign official holdings of U.S. Treasuries increased from $400 billion in January 1994 to about $3 trillion in June 2010. Most of this growth is accounted for by a handful of emerging market economies that have been running large current account surpluses. These countries are channeling their savings through the official sector, which is then acquiring foreign exchange reserves. Any shift in policy to reduce their current account surpluses or dampen the rate of reserves accumulation would likely slow the pace of foreign official purchases of U.S. Treasuries. Would such a slowing of foreign official purchases of Treasury notes and bonds affect long-term Treasury yields? Most likely yes, and the effects appear to be large. By our estimates, if foreign official inflows into U.S. Treasuries were to decrease in a given month by $100 billion, 5-year Treasury rates would rise by about 40–60 basis points in the short run. But once we allow foreign private investors to react to the yield change induced by the shock to foreign official inflows, the long-run effect is about 20 basis points.     

The Strange and Futile World of Trade Wars

U.S. President Donald Trump has a misguided, mercantilist view of international trade. He believes that an external (or “trade”) deficit is a “problem,” and that this deficit is caused by foreigners engaging in unfair trade practices. Accordingly, the president and his followers feel that the U.S. is being—and has long been—victimized by foreigners. The reality, however, is that the negative external balance in the U.S. is neither a “problem” nor is it attributable to foreigners engaging in nefarious activities. The U.S.'s negative external balance, which the country has registered every year since 1975, is “made in the USA.” External balances are always and everywhere homegrown; they are the reflection and the result of the relationship between domestic savings and domestic investment. And it is the gap between a country's savings and domestic investment that is the fundamental driver and determinant of its external balance. Specifically, the current account balance, or “trade deficit,” is the sum of the private savings‐investment gap and the public savings‐investment gap, or what is known as the “fiscal balance.” From 1972 until the end of 2018, for example, the cumulative private sector savings‐investment gap in the U.S. was a positive $12.8 trillion; that is, U.S. companies and individuals collectively saved—that is, earned and retained—some $12.8 trillion more than they consumed and invested domestically. But this positive balance was completely overshadowed by the cumulative negative government gap—or cumulative fiscal deficits—of $24.2 trillion during this 47‐year period. And thus the U.S. as a whole experienced a savings‐investment gap of negative $11.4 trillion that is entirely attributable to the country's fiscal deficits. What's more, the fact that the U.S. recorded a cumulative current account deficit of $11.5 trillion during this period confirms that the U.S. external deficits simply mirror what is happening in the U.S. domestic economy, just as the savings‐investment identity suggests. And, of course, the savings‐investment identity holds true for all countries, even those with significant external surpluses. Japan and China have both long experienced savings surpluses, and both have run current account surpluses that have mirrored their positive savings‐investment gaps. If the U.S. mercantilists understood what causes trade and current account deficits, they would direct their ire at profligate government spending rather than at foreigners. But they don't understand. And the leader of the mercantilists, President Trump, is flying blind and presiding over ever‐expanding fiscal deficits—which will only ensure that the current account deficits not just continue, but get bigger.     

Discovering new points of differentiation

Most profitable strategies are built on differentiation: offering customers something they value that competitors don't have. But most companies concentrate only on their products or services. In fact, a company can differentiate itself every point where it comes in contact with its customers--from the moment customers realize they need a product or service to the time when they dispose of it. The authors believe that if companies open up their thinking to their customer's entire experience with a product or service--the consumption chain--they can uncover opportunities to position their offerings in ways that neither they nor their competitors though possible. The authors show how even a mundane product such as candles can be successfully differentiated. By analyzing its customers' experiences and exploring various options, Blyth Industries, for example, has grown from a $2 million U.S. candle manufacturer into a global candle and accessory business with nearly $500 million in sales and a market value of $1.2 billion. Finding ways to differentiate one's company is a skill that can be nurtured, the authors contend. In this Manager's Tool Kit, they have designed a two-part approach that can help companies continually identify new points of differentiation and develop the ability to generate successful differentiation strategies. "Mapping the Consumption Chain" captures the customer's total experience with a product or service. "Analyzing Your Customer's Experience" shows managers how directed brainstorming about each step in the consumption chain can elicit numerous ways to differentiate any offering.     

Services under siege--the restructuring imperative

Recent job losses in the U.S. service sector do not reflect a temporary recession. Those jobs are gone, the result of a massive restructuring of the sector that is just getting under way. The explanation for the restructuring is quite simple. Until recently, services have been shielded by regulation and confronted by few foreign competitors. They have allowed their white-collar payrolls to become bloated, their investment in information technology to outstrip the paybacks, and their productivity to stagnate. Now competition is heating up and exposing these inefficiencies. Just as intense competition forced the restructuring of Smokestack America in the 1980s, deregulation and foreign direct investment are shaking out service companies that cannot confront their shortcomings. The need for sweeping change in the service sector may come as a great shock to Americans who saw services as the means to continued economic prosperity. But there is a painful irony at work: job creation, the very thing proponents use to demonstrate the U.S. service sector's strength, is in fact a symptom of the sector's chronic neglect of economic efficiency. It is precisely that neglect that makes the service sector vulnerable as the race for market share intensifies and new players shift the terms of competition. Services must respond to the new competitive environment, but not by indiscriminate cost cutting. Instead, they should balance financial discipline with a comprehensive and immediate reexamination of strategy.     

MEASURING CORPORATE TAX RATES AND TAX INCENTIVES: A NEW APPROACH

Taxes play an important but underemphasized role in the valuation of a company and its projects. For example, the authors estimate that the expected tax benefits from interest deductions by all publicly traded U.S. corporations were responsible for almost $1.4 trillion of their total market value of $12.7 trillion in 1991. In the case of RJR's 1989 leveraged buyout alone, the capitalized value of the interest tax shield amounted to several billion dollars (or about 25%) of the company's market value.
This article argues that, to maximize shareholder wealth, the corporate planning process should include a careful analysis of corporate tax incentives. Using several examples, the authors show how earnings variability and major provisions of the tax code interact to affect a company's expected marginal tax rate. After describing the complexities involved in properly calculating corporate tax rates, the article concludes by describing a simulation method the authors have developed to measure a company's effective marginal tax rate and, hence, its tax incentives to use more leverage (or some other means of reducing taxable income).
In furnishing a method for calculating marginal tax rates with greater accuracy, the authors also provide a clue to resolving the capital structure puzzle discussed in the roundtable at the head of this issue. In particular, their recent research corrects earlier studies in the finance literature by showing that when marginal tax rates are measured before financing (that is, based on income before interest expense is deducted), there is a positive relation between debt usage and tax rates.     

Do cash stockpiles fuel cash acquisitions?

U.S. firms currently hold a $2 trillion cash stockpile. We examine if cash stockpiles fuel cash acquisitions by studying the method of payment decision for cash-rich firms. Surprisingly, cash-rich firms are 23% less likely to make cash bids than stock bids, relative to firms that are not cash rich. We examine several potential explanations related to omitted variable bias and endogeneity and the result remains. More specifically, the results are robust to explanations related to agency, financial constraints, tax-related explanations, equity overvaluation, and capital structure. Our evidence implies that the link between cash stockpiles and cash acquisitions is not obvious.     

The myth of Japan's low-cost capital

The low rate at which U.S. companies are investing in manufacturing and the resulting decline in America's competitive position has been a topic of grave concern for more than a decade. During that time, critics have offered many excuses for this shortsighted investment behavior. Yet one excuse has steadily gained adherents and is becoming something of an article of faith--that is, that capital in the United States is more expensive than in other countries, particularly Japan. It is both a popular and appealing argument. Yet authors W. Carl Kester and Timothy A. Luehrman, professors at the Harvard Business School, warn that this argument is not only false but also dangerous. They assert that the empirical evidence does not support the claim that the U.S. manufacturing sector has persistently faced significantly higher average capital costs than the Japanese manufacturing sector. The authors argue that differences in capital costs have been isolated and temporary, not broad and persistent. To prove their point, Kester and Luehrman critically dissect both the common wisdom and the academic studies on the topic. They conclude that in the new global economy, all companies--Japanese, American, European, and others--must compete for the same capital. Some will succeed in obtaining it on temporarily favorable terms, not because they are Japanese but because they are efficiently organized and governed. But as long as an alleged international cost-of-capital gap is their excuse, U.S. managers run the risk of retaliating counterproductively against U.S. trading partners or doing nothing at all inside corporations. In short, managers should stop complaining about how much capital costs and worry more about how to manage it after it's been raised.     

TO OWN OR TO FRANCHISE?: THE INTERNATIONAL CONTROL DECISION FOR SERVICE COMPANIES

Franchising, which accounts for a significant share of the U.S. domestic service industry, has also become a major strategic alternative in the international expansion of U.S. service firms. This article attempts to explain the international franchising and control decision by U.S.-based service firms in terms of a theoretical framework that borrows from agency theory and transaction-cost analysis. Specifically, it attempts to answer the following question: Why would a well-established service firm choose to operate in certain countries through a franchising agreement whereas in others it would set up a wholly-owned subsidiary? In their empirical test of a sample of over 10,000 international service units that were either owned or franchised by 12 U.S. multinational service companies, the authors find that the most important determinants of the decision to franchise rather than own are the following four: (1) geographical distance from headquarters; (2) extent of cultural differences; (3) years of international experience; and (4) degree of concern about reputation or brand name. Greater geographic and cultural distance make service companies more likely to franchise, as do greater experience and familiarity with international business settings. Greater concern about brand name, by contrast, makes companies more likely to own than franchise. Measures of political and exchange risk have no detectable effect.     

Private equity and Covid-19

We survey more than 200 private equity (PE) managers from firms with $1.9 trillion of assets under management (AUM) about their portfolio performance, decision-making and activities during the Covid-19 pandemic. Given that PE managers have significant incentives to maximize value, their actions during the pandemic should indicate what they perceive as being important for both the preservation and creation of value. PE managers believe that 40% of their portfolio companies are moderately negatively affected and 10% are very negatively affected by the pandemic. The private equity managers—both investment and operating partners—are actively engaged in the operations, governance, and financing in all of their current portfolio companies. These activities are more intensively pursued in those companies that have been more severely affected by the Covid-19 pandemic. As a result of the pandemic, they expect the performance of their existing funds to decline. They are more pessimistic about that decline than the venture capitalists (VCs) surveyed in Gompers et al. (2021). Despite the pandemic, private equity managers are seeking new investments. Rather than focusing on cost cutting, PE investors place a much greater weight on revenue growth for value creation. Relative to the 2012 survey results reported in Gompers, Kaplan, and Mukharlyamov (2016), they appear to give a larger equity stake to management teams and target somewhat lower returns.     

Risk Transfer with Interest Rate Swaps

This paper proposes Entity‐Netted Notionals (ENNs) as a metric of interest rate risk transfer in the interest rate swap (IRS) market. Unlike the ubiquitous metric of notional amount, ENNs normalize for risk and account for the netting of longs and shorts within counterparty relationships. Using regulatory data for U.S.‐reporting entities, the size of the market measured by notional amount is $231 trillion, but, measured by ENNs, is only $13.9 trillion 5‐year swap equivalents, which is the same order of magnitude as other large U.S. fixed income markets. This paper also quantifies the size and direction of IRS positions across and within various business sectors. Among the empirical findings are that 92% of entities using IRS are exclusively long or exclusively short. Hence, the vast majority of market participants are prototypical end users, and the extensive amount of netting in the market is attributable to the activity of relatively few, larger entities. Finally, some sector‐specific empirical findings are inconsistent with widespread, prior beliefs. For example, pension funds and insurance companies are typically thought to be long IRS to hedge their long‐term liabilities, and these sectors are indeed net long, but approximately 50% of individual entities in these sectors are actually net short.     

Reappearing Dividends

During the last two decades of the 20th century, the propensity of U.S. companies to pay cash dividends declined significantly. The trend away from dividends accelerated during the late 1990s, leading some economists to conclude that dividend policy was shifting in a very fundamental way. But there was a sharp reversal in this trend starting in 2000.
This article investigates five possible explanations why dividends are reappearing. Given the explosion of new companies during the 1990s, the authors find that part of this rebound can be explained by the "maturity hypothesis"– by the need for such companies to pay out their excess "free cash fiow" to reassure investors that it will not be wasted on value-destroying investments. The authors also report evidence that some companies have chosen to use dividends in part to restore investor confidence about the "quality" of corporate earnings in the wake of concerns over corporate governance. Third, the authors' findings suggest that U.S. companies have responded to the recent dividend tax cut, as one might expect, although the rebound in dividends started well before tax reform became a widely discussed possibility. Finally, the study finds little support for behavioralist explanations in which managers "cater" to irrational investor preferences for dividends. Although the authors hesitate to read too much into the recent rebound, their evidence is consistent with the idea that corporate payout policy has shifted back in favor of conventional cash dividends.     

University of Texas Roundtable on The State of the U.S. Private Equity Market

In this discussion that took place at the 2017 University of Texas Private Equity conference, the moderator began by noting that since 2000, the fraction of the U.S. GDP produced by companies that are owned or controlled by global private equity firms has increased from 7% to 15%. What's more, today's PE firms have raised an estimated $1.5 trillion of capital that is now available for investing. And thanks in part to this abundance of capital, the prices of PE transactions have increased sharply, with EBITDA pricing multiples rising from about 8.8X in 2012 to 11.5X at the beginning of 2017. Partly as a consequence of such abundant capital and high transaction prices, the aggregate returns to U.S. private equity funds during this four‐year period have fallen below the returns to the stockholders of U.S. public companies. Nevertheless, the good news for private equity investors is that the best‐performing PE firms have continued their long history of outperforming the market. And the consistency of their performance goes a long way toward explaining why the overwhelming majority of the capital contributed by limited partners continues to be allocated to funds put together by these top‐tier PE firms. In this roundtable, a representative of one of these top‐tier firms joins the founder of a relatively new firm with a middle‐market focus in discussing the core competencies and approaches that have enabled the best PE firms to increase the productivity and value of their portfolio companies. Effective financial management—the ability to manage leveraged capital structures and the process of readying their companies for sale to potential strategic or financial investors—is clearly part of the story. But more fundamental and critical to their success has been their ability to find undervalued or undermanaged assets—and either retain or recruit operating managements that, when effectively monitored and motivated, are able to realize the potential value of those assets through changes in strategy and increases in operating efficiency.     

Corporate Governance and the Investment Efficiency of Diversified Corporate Asset Buyers

Many corporate assets are bought and sold each year in the U.S. and most scholars believe these transactions improve economic efficiency. But given the reality that the interests of corporate managers may diverge from those of their shareholders and reflect empire‐building or other managerial entrenchment strategies—and that such agency problems tend to be worse in highly diversified, multi‐divisional companies—the authors tested the proposition that diversified corporate asset buyers with more effective governance structures can be expected to allocate capital more efficiently, as reflected in higher rates of return on operating capital and more favorable market reactions to the announcements of their purchases. Using a sample of diversified U.S. companies that announced large asset purchases between 1988 and 2006, the authors report finding that the investment allocation process following such asset purchases was more consistent with value creation in the case of diversified buyers with more effective governance structures, which were identified by their greater board independence, higher‐quality audit committees, and higher levels of stock ownership by institutional ownership, directors, and CEOs.     

How Does the Corporate World Cope with Mega‐Terrorism? Puzzling Evidence from Terrorism Insurance Markets

Terrorist attacks that have succeeded abroad since 2001, as well as others that were prevented, indicate that the threat of a large‐scale attack is real and will be with us for a long time. Focusing on the United States, the United Kingdom, and Germany, this article analyzes the role that insurance can play in providing commercial enterprises with financial protection against the economic consequences of major terrorist attacks. The article begins by explaining the design and key features of terrorism insurance programs operating today in each of the three countries (TRIA in the U.S., Pool Re in the U.K., and Extremus in Germany). The authors then provide a detailed comparative analysis of the evolution of prices and take‐up rates (based on as yet unpublished data), with particular attention to financial institutions. For those who think the U.S. is the most likely target for mega‐terrorism, the findings are somewhat puzzling. On average, for example, companies in the U.S. do not pay even half as much for comparable coverage under TRIA as companies pay in Germany under Extremus, which raises the questions: Is terrorism coverage under the U.S. insurance program now drastically underpriced? If so, what would be the likely consequences of another large‐scale attack in the U.S.? On the demand side, the authors observe a dramatic increase in take‐up rates in the U.S. since 2003, revealing increased corporate concern. By contrast, the market penetration in Germany remains remarkably low. A better understanding of these programs and of the recent evolution of terrorism insurance markets in the U.S. and Europe should help corporate and government decision makers develop more effective protection against the economic consequences of mega‐terrorism.     

Consumer strategy in the public sector: Are you being served?

If your consumers had a choice, would they still choose you? Looking at your service through their eyes is a useful first step in working towards a positive answer to that question. Public sector managers need market sensitivity, whether or not they are monopoly suppliers of services.     

Does Mandatory Shareholder Voting Prevent Bad Acquisitions? The Case of the United Kingdom

A large number of studies have shown that many companies have made large acquisitions that their own shareholders probably would not have approved if given the opportunity to do so. In this article, which summarizes the findings of their study published recently in the Review of Financial Studies, the authors present evidence that suggests the effectiveness of shareholder voting as a corporate governance mechanism designed to prevent such value‐reducing acquisitions from taking place. The authors' study focused on acquisitions in the U.K. where proposed transactions that exceed a series of 25% relative size (target's as a percentage of the acquirer's) thresholds are defined as “Class 1” transactions and require shareholder approval. The authors found strikingly positive stock market reactions to the announcements of such Class 1 acquisitions—as compared to zero if not negative average announcement returns for Class 2 transactions that were not subject to a shareholder vote. And when the authors extended their analysis to U.S. M&A markets, they found that the larger (again, in relative size) U.S. deals—large enough that they would have required a shareholder vote in the U.K.—provided returns to their shareholders that were negative, and thus significantly lower than those of their U.K counterparts. In terms of the economic significance of their findings, the authors found that Class 1 transactions were associated with aggregate gains to acquirer shareholders of $13.6 billion. By contrast, U.S. transactions of similar size, which again were not subject to shareholder approval, were associated with aggregate losses of $210 billion for acquirer shareholders; and Class 2 U.K. transactions, also not subject to shareholder approval, were associated with aggregate losses of $3 billion. In a further series of tests designed to shed light on how mandatory shareholder voting generates such substantial value improvements for acquirer shareholders, the authors also found evidence suggesting that when faced with the requirement of a shareholder vote, CEOs and boards are more likely to resist the temptation to overpay to close a deal. And the fact that the shareholders of the Class 1 acquirers did not end up blocking a single transaction that was submitted to a vote suggests that this mechanism works without the need for shareholders to actually vote down a deal. In other words, mandatory shareholder voting on acquisitions is a powerful deterrent to “bad deals” because, first of all, the vote is triggered automatically by the relative size tests and, second, CEOs and boards, with the help of their bankers, have a pretty good idea well in advance of the vote whether their shareholders are going to vote “no”—and such a vote would be viewed by top management as a major rejection, a strong vote of no confidence.     

WHAT DO WE KNOW ABOUT STOCK REPURCHASES?

Stock repurchases by U.S. companies experienced a remarkable surge in the 1980s and ‘90s. Indeed, in 1998, the total value of all stock repurchased by U.S. companies exceeded for the first time the total amount paid out as cash dividends. And the U.S. repurchase movement has gone global in the past few years, spreading not only to Canada and the U.K., but also to countries like Japan and Germany, where such transactions were prohibited until recently. Why are companies buying back their stock in such amounts? After dismissing the popular argument that stock repurchases boost earnings per share, the authors argue that repurchases serve to add value in two main ways: (1) they provide managers with a tax‐efficient means of returning excess capital to shareholders and (2) they allow managers to “signal” to investors their view that the firm is undervalued. Returning excess capital is value‐adding for two reasons: First, it helps prevent companies from pursuing growth and size at the expense of profitability and value. Second, by returning capital to investors, repurchases (like dividends) play the critically important economic function of allowing investors to channel their investment from mature or declining sectors of the economy to more promising ones. But if stock repurchases and dividends serve the same basic economic function, why are repurchases growing more rapidly? Part of the explanation is that, because repurchases are taxed as capital gains and dividends as ordinary income, repurchases are a more tax‐efficient way of distributing excess capital. But perhaps even more important than their tax treatment is the flexibility that (at least) open market repurchases provide corporate managers‐flexibility to make small adjustments in capital structure, to exploit (or correct) perceived undervaluation of the firm's shares, and possibly even to increase the liquidity of the stock, which could be particularly valuable in bear markets. For U.S. regulators, the growth in open market stock repurchases raises some interesting issues. Perhaps most important, companies are not required to (and rarely do) furnish their investors with details about a given program's structure, execution method, number of shares repurchased, or even its duration. Policy regulators (and corporate executives as well) should consider some of the benefits provided by other systems, notably Canada's, which provide greater transparency and more guidelines for the repurchase process.     

Deleveraging Corporate America: Job and Business Recovery Through Debt Restructuring

When the Great Recession roiled capital and labor markets in early 2009, up to a third of U.S. public corporations, and nearly 60% of privately owned companies, reported high levels of financial distress resulting from frozen credit markets. And the problems of “debt overhang” and corporate underinvestment were clearly in evidence as the combination of default risk and a relatively new provision of the tax code restricted the ability of distressed companies to deleverage their capital structures. But as described in this article, at least 110 U.S. companies used a little known provision in the American Recovery and Reinvestment Act of 2009 to defer taxes on the cancellation of debt income (CODI) resulting from exchanges or repurchases of significant amounts of debt. This suspension of tax policy gave many distressed U.S. companies the flexibility to cut costs, shore up balance sheets, and boost liquidity, thereby keeping themselves in business and their workers employed throughout the economic crisis. The 110 companies examined either repurchased or exchanged a total of $32.5 billion of corporate debt. The deleveraging of these companies, which represented more than $2.2 trillion in total assets and $520 billion in market capitalization, helped them to remain solvent throughout the downturn and retain their collective 2.2 million employees. The resulting tax savings are estimated to have saved (or in some cases created) almost 90,000 jobs, while contributing $3.2 billion to total corporate earnings and $10.7 billion of output to the national gross domestic product. Although this approach could be criticized as adding to the federal budget deficit, the deferral of taxes on CODI is viewed as a targeted financial policy tool aimed directly at boosting the productive capacity and employment of corporate enterprises.     

THE GROWTH OF INSTITUTIONAL STOCK OWNERSHIP: A PROMISE UNFULFILLED

Despite the substantial growth of institutional ownership of U.S. corporations in the past 20 years, there is little evidence that institutional investors have acquired the kind of concentrated ownership positions required to be able to play a dominant role in the corporate governance process. Institutional ownership remains widely dispersed among firms and institutions in large part because of significant legal obstacles that discourage institutional investors both from taking large block positions and from exercising large ownership positions to control corporate managers. Thus, although much of the growth of institutional ownership since 1980 has been accounted for by the growth of mutual funds and private pension funds, there continue to be strong deterrents to the accumulation and use of large ownership positions to influence corporate managers. Another potentially important factor discouraging concentrated investments are incentive schemes that effectively reward money managers for producing returns that do not vary much from the S&P 500 (or whatever sector the manager is supposed to be representing). Using a very different incentive scheme that offers managers a share of the excess returns (as well as penalties for failure to meet benchmarks), a relatively new class of “hedge funds” has emerged that provides both more concentrated ownership positions and higher risk‐adjusted rates of return. To encourage mutual funds to take a more activist corporate governance role and to behave more like hedge funds, the authors recommend that current legal restrictions on mutual funds be relaxed so that mutual funds have a greater incentive to hold large ownership positions in companies and to use those positions to more effectively monitor corporate managers. In particular, the “five and ten” portfolio rules applicable to mutual funds could be repealed and replaced with a standard of prudence and diligence more in keeping with portfolio theory; mutual funds could be given greater freedom to adopt redemption policies that would be more conducive to holding larger ownership positions; and institutional investors could be permitted to employ a variety of incentive fee structures to encourage fund managers to pursue more pro‐active investment strategies. The prospect of actively involving institutional fund managers in the corporate governance process may be our best hope for improving U.S. corporate governance.     

A Primer on the Financial Policies of Chinese Firms: A Multi‐country Comparison

Chinese companies have grown rapidly over the past few decades, and become increasingly global in the process. In the past five years, the aggregate market capitalization of public companies in China increased more than ten‐fold and their revenue from outside China grew 60%. Nevertheless, Chinese companies have financial policies that are notably different from those of their global counterparts in North America and Europe, and that difference could end up limiting their future profitability and growth. In this report, J.P. Morgan's Corporate Finance Advisory team compares the capital structures of large Chinese companies to those of the largest companies in the U.S., the U.K. and Germany. Among the most important findings, Chinese companies have materially more leverage, much greater reliance on bank loans than bonds, and maturities that are almost 80% shorter than those of typical U.S. companies. To bring their balance sheets in line with those of their global peers, Chinese companies are likely to have to raise over 5 trillion yuan (over $750 billion) in equity while also issuing roughly the same amount in bonds. At the same time, in order to attract that capital on economic terms, they will likely need to find ways to increase the profitability of their businesses, whose return on equity is well below international standards. As the authors point out in closing, making such significant changes in financial and operating policies could be challenging for all stakeholders, and cause some potential dislocation in the short run. But however disruptive, such changes are most likely to ensure the ability of Chinese companies to create the most value in the long run.