The Euro and Corporate Financing before the Crisis
IMD International; European Corporate Governance Institute (ECGI); Yale University - International Center for Finance
Boston University - School of Management; Centre for Economic Policy Research (CEPR)
University of Colorado at Boulder - Leeds School of Business
July 30, 2013
Boston U. School of Management Research Paper Series No. 2011-1
Private sector borrowing and related current account deficits have been identified as the major causes for the euro crisis. In this paper we study the contribution of non-financial corporations to these macro imbalances in Europe before the onset of the crisis. In particular, we examine corporate debt financing and leverage patterns. We use firm level data from eleven euro-countries as well as from a control group of five other European countries spanning the years 1991-2006. We show that firms from euro-countries that previously had weak currencies have considerably increased debt financing compared to the control group. Results are stronger for large firms and for firms that are dependent on external financing. We also show that book leverage has increased for firms from weak euro-countries. There is no evidence of an increase in market leverage. Thus the increase in debt financing is commensurate with an increase in debt capacity based on pre-crisis stock valuations.
Number of Pages in PDF File: 54
Keywords: euro, external financing, debt financing, leverage, supply of capital, financial dependence, financial fragility
JEL Classification: F33, F36, G32working papers series
Date posted: February 10, 2011 ; Last revised: July 31, 2013
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