Government Debt and Corporate Leverage: International Evidence

55 Pages Posted: 10 Apr 2017

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); AQR Capital Management, LLC

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Date Written: April 2017

Abstract

We investigate the impact of government debt on corporate financing decisions. We document a negative relation between government debt and corporate leverage using data on 40 countries between 1990 and 2014. This negative relation holds only for government debt that is financed domestically and is stronger for larger and more profitable firms 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.

Suggested Citation

Demirci, Irem and Huang, Jennifer and Sialm, Clemens, Government Debt and Corporate Leverage: International Evidence (April 2017). NBER Working Paper No. w23310. Available at SSRN: https://ssrn.com/abstract=2949614

Irem Demirci (Contact Author)

Nova School of Business and Economics ( email )

Lisbon
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

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

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