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Institutions, financial markets, and firms'choice of debt maturity

  • Demirguc-Kunt, Asl1
  • Maksimovic, Vojislav

This report examines the maturity of liabilities in firms in thirty developed and developing countries between 1980 and 1991. It finds systematic differences in the use of long-term debt between developed and developing countries, and between small and large firms. The authors attempt to explain the observed cross-country leverage and maturity variations by differences in their legal systems, financial institutions, government subsidy levels, firm characteristics, and in macroeconomic factors, such as the inflation rate and the economy's growth rate. The report provides evidence confirming that firms in developing countries have less long-term debt, even after accounting for their characteristics. This lack of term finance is mainly owing to institutional differences, such as the extent of government subsidies, the different level of development for stock markets and banks, and the differences in the underlying legal infrastructure. The report indicates that while policies that help develop legal and financial infrastructure are effective in increasing firm access to long-term debt, different policies would be necessary to lengthen the debt maturity of large and small firms. Improvements in legal efficacy seem to benefit all firms, although this result is much less significant for the smallest firms, which have limited access to the legal system. Similarly, policies that would help improve the functioning and liquidity of stock markets, would also mostly benefit large firms. In contrast, policies that would lead to improvements in the development of the banking system would improve the access of smaller firms to long-term credit.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1686.

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Date of creation: 30 Nov 1996
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Handle: RePEc:wbk:wbrwps:1686
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  2. Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1996. "Law and Finance," NBER Working Papers 5661, National Bureau of Economic Research, Inc.
  3. Sanford J Grossman & Joseph E Stiglitz, 1997. "On the Impossibility of Informationally Efficient Markets," Levine's Working Paper Archive 1908, David K. Levine.
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  5. 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.
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  7. Demirguc-Kunt, Asli & Levine, Ross, 1995. "Stock market development and financial intermediaries : stylized facts," Policy Research Working Paper Series 1462, The World Bank.
  8. A. Michael Spence, 1985. "Capital Structure and the Corporation's Product Market Environment," NBER Chapters, in: Corporate Capital Structures in the United States, pages 353-382 National Bureau of Economic Research, Inc.
  9. Hart, Oliver & Moore, John, 1995. "Debt and Seniority: An Analysis of the Role of Hard Claims in Constraining Management," American Economic Review, American Economic Association, vol. 85(3), pages 567-85, June.
  10. Maksimovic, Vojislav & Titman, Sheridan, 1991. "Financial Policy and Reputation for Product Quality," Review of Financial Studies, Society for Financial Studies, vol. 4(1), pages 175-200.
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  12. Hodder, James E & Senbet, Lemma W, 1990. " International Capital Structure Equilibrium," Journal of Finance, American Finance Association, vol. 45(5), pages 1495-1516, December.
  13. Patrick Bolton & David S Scharfstein, 1993. "Optimal Debt Structure with Multiple Creditors," CEPR Financial Markets Paper 0032, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ..
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  15. 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.
  16. Hoshi, Takeo & Kashyap, Anil & Scharfstein, David, 1990. "The role of banks in reducing the costs of financial distress in Japan," Journal of Financial Economics, Elsevier, vol. 27(1), pages 67-88, September.
  17. Singh, A. & Hamid, J., 1992. "Corporate Financial Structure in Developing Countries," Papers 1, World Bank - International Finance Corporation.
  18. Smith, Clifford Jr. & Warner, Jerold B., 1979. "On financial contracting : An analysis of bond covenants," Journal of Financial Economics, Elsevier, vol. 7(2), pages 117-161, June.
  19. Lee, Moon H. & Zechner, Josef, 1984. "Debt, taxes, and international equilibrium," Journal of International Money and Finance, Elsevier, vol. 3(3), pages 343-355, December.
  20. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  21. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
  22. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
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  25. Flannery, Mark J, 1986. " Asymmetric Information and Risky Debt Maturity Choice," Journal of Finance, American Finance Association, vol. 41(1), pages 19-37, March.
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