Government Debt and Corporate Leverage: International Evidence
69 Pages Posted: 21 Nov 2016 Last revised: 10 Sep 2018
Date Written: September 3, 2018
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: Suggested Citation