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