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Access to long term debt and effects of firm's performance : lessons from Ecudaor

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  • Jaramillo, Fidel
  • Schiantarelli, Fabio

Abstract

Recent theory increasingly emphasizes the association of short-term debt with higher-quality firms and better incentives. The possibility of premature liquidation, for example, may serve as a disciplinary device to improve firm performance. At the same time the role of long-term debt, especially when it is heavily subsidized, is being rethought because so many development banks are plagued with nonperforming loans and doubts about the selection criteria used in allocating funds. The authors explore empirical evidence about the structure of debt maturity in Ecuadorian firms. They discuss how it has been affected by government intervention in credit markets, and by financial liberalization. Using firm panel data, they investigate the determinants of access to long-term debt in Ecuador. Finally, they provide evidence about how the maturity structure of debt affects firms'performance, particularly productivity and capital accumulation. They find that: a) long-term debt is very unevenly distributed; b) large firms are more likely to have access to long term debt than small firms and are on average more profitable; c) conditional on size, operating profits do not increase probability of receiving long-term credit and may actually decrease it, suggesting that the mechanism used to allocate long-term resources in Ecuador may be flawed; d) the allocation problem was worse for directed credit, though there is evidence this problem was less severe after financial liberalization; e) there is a strong positive association between asset maturity and debt maturity, a matching of assets and liabilities; f) shorter-term loans are not conducive to greater productivity, while long-term loans may lead to improvements in productivity; and g) while long-term loans may positively affect the quality of capital accumulation, they do not have an impact on the amount of fixed investment.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1725.

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Date of creation: 28 Feb 1997
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Handle: RePEc:wbk:wbrwps:1725

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Keywords: Economic Theory&Research; Payment Systems&Infrastructure; Environmental Economics&Policies; Banks&Banking Reform; Strategic Debt Management; Economic Theory&Research; Environmental Economics&Policies; Banks&Banking Reform; Strategic Debt Management; Financial Intermediation;

References

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  1. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
  2. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
  3. Rajan, Raghuram G, 1992. " Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, vol. 47(4), pages 1367-400, September.
  4. Jaramillo, Fidel & Schiantarelli, Fabio & Weiss, Andrew, 1993. "The effect of financial liberalization on allocation of credit : panel data evidence for Ecuador," Policy Research Working Paper Series 1092, The World Bank.
  5. Fabio Schiantarelli & Andrew Weiss & Fidel Jaramillo, 1993. "Capital Market Imperfections Before And After Financial Liberization: An Euler Equation Approach To Panel Data For Ecuadorian Firms," Boston College Working Papers in Economics 221, Boston College Department of Economics.
  6. Oliver Hart & John Moore, 1991. "A Theory of Debt Based on the Inalienability of Human Capital," STICERD - Theoretical Economics Paper Series /1991/233, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  7. Stephen Nickell & D Nicolitsas, 1995. "How Does Financial Pressure Affect Firms?," CEP Discussion Papers dp0266, Centre for Economic Performance, LSE.
  8. Harris, Milton & Raviv, Artur, 1990. " Capital Structure and the Informational Role of Debt," Journal of Finance, American Finance Association, vol. 45(2), pages 321-49, June.
  9. Diamond, Douglas W., 1993. "Seniority and maturity of debt contracts," Journal of Financial Economics, Elsevier, vol. 33(3), pages 341-368, June.
  10. Oliver Hart & John Moore, 1994. "Debt and Seniority: An Analysis of the Role of Hard Claims in Constraining Management," NBER Working Papers 4886, National Bureau of Economic Research, Inc.
  11. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  12. Chamberlain, Gary, 1980. "Analysis of Covariance with Qualitative Data," Review of Economic Studies, Wiley Blackwell, vol. 47(1), pages 225-38, January.
  13. Barclay, Michael J & Smith, Clifford W, Jr, 1995. " The Maturity Structure of Corporate Debt," Journal of Finance, American Finance Association, vol. 50(2), pages 609-31, June.
  14. Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, vol. 81(3), pages 497-513, June.
  15. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  16. Jaramillo, Fidel & Schiantarelli, Fabio & Weiss, Andrew, 1993. "Capital market imperfections before and after financial liberalization : a Euler Equation approach to panel data for Ecuadorian firms," Policy Research Working Paper Series 1091, The World Bank.
  17. Diamond, Douglas W, 1991. "Debt Maturity Structure and Liquidity Risk," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 709-37, August.
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