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Government Debt and Corporate Leverage: International Evidence

Listed author(s):
  • Irem Demirci
  • Jennifer Huang
  • Clemens Sialm

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 23310.

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Date of creation: Apr 2017
Handle: RePEc:nbr:nberwo:23310
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