Determinants of the financialstructure of firms Empirical ...

Determinants of the financial structure of firmsEmpirical evidence

1V. CERASI - PRINCIPLES OF CORPORATE FINANCE

Rajan and Zingales JF, 1995 (developed countries)

What determine the level of debt across firms?

Theory:

◦ Favourable fiscal treatment of debt, but bankruptcy costs [trade–off]

◦ Agency costs of debt (incentives and risk shifting) [Costs and benefits of debt]

◦ Information asimmetries (pecking order) [ordering in sources of finance: i) self-finance; ii) debt; iii)

equity]


Data (Source: Global Vantage = SNL Financial)

WHAT?

Balance sheet records and stock prices for individual listed companies (consolidated, excludingfinancial firms)

WHERE?

OECD (US, Japan, Germany, France, Italy, UK, Canada)

WHEN?

1987-1991


Aggregate (at country level) differences



Leverage (stocks)

Anglo-saxon firms less levered;

Germany, Italy and Japan highly levered


Adjusted Leverage (stocks)

Germany and UK are less levered;

All other countries have approximately the same leverage


External financing (flow of financing)

External financing is smaller than internal financing in US; not so true in Japan


What explain these differences?

Tax code, bankruptcy laws, bank orientation, patterns of ownerships?

Tax differences? Maybe

Bankruptcy laws? During bankruptcy two parties bargain over the resolution: creditors vs. insiders. Ifthe law protects creditors during distress, then liquidation is likely; otherwise conservation of the firmas going concern. Ex-post creditors are better off, but ex-ante insiders will not issue debt. In Germany creditors are more protected during bankruptcy, while In US (Chap.11) the law is less friendly to creditors. Where do you expect to see more debt?

Bank orientation: bank oriented (Germany, Italy, Japan, France) vs. market oriented (US, Canada, UK)? Effect on the source of debt (stocks and bonds vs. loans), not so much on the amount of debt: bankoriented countries have smaller financial markets (measured as stock market capitalization)

Ownership concentration: not clear the effect.


Bank vs. non-bank oriented


Individual (at firm level) differences


Factors explaining differences in leverage


Equation to be estimated

Tangible assets (collateral): more debt (+)

MTB ratio (proxy for investment opportunities): more equity (-)

Firm size (proxy for diversification, lower risk of default): more debt (+)

Profitability (more internal funds): more/less debt? (+/-)



Who next?


Thanks for your attention!


Determinants of the financialstructure of firms Empirical ...

Documents