How Does Long-Term Finance Affect Economic Volatility?

In an approach analogous to Rajan and Zingales (1998), we examine how the ability to access long-term debt affects firm-level growth volatility. We find that firms in industries with stronger preference to use long-term finance relative to short-term finance experience lower growth volatility in countries with better-developed financial systems, as these firms may benefit from reduced refinancing risk. Institutions that facilitate the availability of credit information and contract enforcement mitigate refinancing risk and therefore growth volatility associated with short-term financing. Increased availability of long-term finance reduces growth volatility in crisis as well as non-crisis periods.

Keywords: Debt maturity; financial dependence; firm volatility; financial development

JEL Classification: G20, G32, O16

Suggested Citation: Suggested Citation

Demirgüç-Kunt, Asli and Horvath, Balint and Huizinga, Harry, How Does Long-Term Finance Affect Economic Volatility? (January 21, 2016). CentER Discussion Paper Series No. 2016-005, European Banking Center Discussion Paper Series No. 2016-002, Available at SSRN: https://ssrn.com/abstract=2719563 or http://dx.doi.org/10.2139/ssrn.2719563