Government Debt and Corporate Leverage: International Evidence

69 Pages Posted: 21 Nov 2016 Last revised: 10 Sep 2018

See all articles by Irem Demirci

Irem Demirci

Nova School of Business and Economics

Jennifer Huang

Cheung Kong Graduate School of Business

Clemens Sialm

University of Texas at Austin - McCombs School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 3, 2018

Abstract

We empirically investigate the impact of government debt on corporate financing decisions in an international setting. We document 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. In order 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.

Keywords: Government Debt, Capital Structure, Crowding Out

JEL Classification: E44, E50, G11, G38

Suggested Citation

Demirci, Irem and Huang, Jennifer and Sialm, Clemens, Government Debt and Corporate Leverage: International Evidence (September 3, 2018). Available at SSRN: https://ssrn.com/abstract=2872600 or http://dx.doi.org/10.2139/ssrn.2872600

Irem Demirci (Contact Author)

Nova School of Business and Economics ( email )

Campus de Carcavelos
Rua da Holanda, 1
Carcavelos, 2775-405
Portugal

Jennifer Huang

Cheung Kong Graduate School of Business ( email )

Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China

Clemens Sialm

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

HOME PAGE: http://faculty.mccombs.utexas.edu/Clemens.Sialm/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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