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Does the Introduction of the Euro affect the Debt-Equity Choice?

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  • Karin Jõeveer

    () (Keele University, Centre for Economic Research and School of Economic and Management Studies)

  • Peter Tóth

    () (CERGE-EI)

Abstract

We study firms from 14 Western European countries to detect the influence of a vanishing risk premium due to exchange rate risk on equity and debt issues. According to our hypothesis, Eurozone firms in industries with relatively higher external finance dependence (EFD) issue more equity and debt after 1999 than those outside the Euro area. We could explain the above by increased net present value of projects due to cheaper equity finance when internal funds are scarce. We find that Eurozone firms in high EFD industries are more likely to issue equity, and are more likely to be equity issuers than debt issuers after 1999. Further, there is evidence that firms in our sample follow a dynamic leverage target. Our results are consistent with previous studies and theories saying that an increase in a firm’s value due to perceived growth opportunities should be financed by equity issues. The above findings suggest that joining the Eurozone among others means higher growth prospects for some industries and firms.

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Bibliographic Info

Paper provided by Centre for Economic Research, Keele University in its series Keele Economics Research Papers with number KERP 2006/22.

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Length: 19 pages
Date of creation: Oct 2006
Date of revision:
Handle: RePEc:kee:kerpuk:2006/22

Contact details of provider:
Postal: Department of Economics, University of Keele, Keele, Staffordshire, ST5 5BG - United Kingdom
Phone: +44 (0)1782 584581
Fax: +44 (0)1782 717577
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Web page: http://www.keele.ac.uk/depts/ec/cer/
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Postal: Centre for Economic Research, Research Institute for Public Policy and Management, Keele University, Staffordshire ST5 5BG - United Kingdom
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Web: http://www.keele.ac.uk/depts/ec/cer/pubs_kerps.htm

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Keywords: Euro introduction; external finance dependence; firm performance.;

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References

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  1. Hovakimian, Armen & Opler, Tim & Titman, Sheridan, 2001. "The Debt-Equity Choice," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 36(01), pages 1-24, March.
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