How Does Long-Term Finance Affect Economic Volatility?

CentER Discussion Paper Series No. 2016-005

European Banking Center Discussion Paper Series No. 2016-002

62 Pages Posted: 22 Jan 2016

See all articles by Asli Demirgüç-Kunt

Asli Demirgüç-Kunt

World Bank

Balint Horvath

Tilburg University - Department of Economics

Harry Huizinga

Tilburg University - Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR)

Date Written: January 21, 2016

Abstract

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

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

Asli Demirgüç-Kunt (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Balint Horvath

Tilburg University - Department of Economics ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Harry Huizinga

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2623 (Phone)
+31 13 466 3042 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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