Publication
Government debt and corporate leverage
| Summary: | We empirically investigate the impact of government debt on corporate financing decisions in an international setting. We show a negative relation between government debt and corporate leverage using data on 40 countries between 1990–2014. This negative relation is stronger for government debt that is financed domestically, for firms that are larger and more profitable, and in countries with more developed equity markets. To address potential endogeneity concerns, we use an instrumental variable approach based on military spending and a quasi-natural experiment based on the introduction of the Euro currency. Our findings suggest that government debt crowds out corporate debt. |
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| Main Authors: | Demirci, Irem |
| Other Authors: | Huang, Jennifer; Sialm, Clemens |
| Subject: | Capital structure Crowding out Government debt Accounting Finance Economics and Econometrics Strategy and Management |
| Year: | 2019 |
| Country: | Portugal |
| Document type: | article |
| Access type: | open access |
| Associated institution: | Universidade Nova de Lisboa |
| Language: | English |
| Origin: | Repositório Institucional da UNL |
| Summary: | We empirically investigate the impact of government debt on corporate financing decisions in an international setting. We show a negative relation between government debt and corporate leverage using data on 40 countries between 1990–2014. This negative relation is stronger for government debt that is financed domestically, for firms that are larger and more profitable, and in countries with more developed equity markets. To address potential endogeneity concerns, we use an instrumental variable approach based on military spending and a quasi-natural experiment based on the introduction of the Euro currency. Our findings suggest that government debt crowds out corporate debt. |
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