The determinants of corporate debt ownership structure: evidence from market-based and bank-based economies

Krishna Paudyal, A Antoniou, Y Guney

Research output: Contribution to journalArticle

9 Citations (Scopus)

Abstract

Purpose – This paper aims to investigate the determinants of choice between private and public debt for British and German listed companies. Design/methodology/approach – The paper is based on three strands of theories: the ‘‘liquidation and renegotiation’’ hypothesis; the ‘‘moral hazard and adverse selection’’ hypothesis; the ‘‘flotation cost’’ hypothesis. The regression analysis was adopted to test these hypotheses. The specific econometric method used for panel data is generalised method of moments (GMM). Findings – The evidence records a few similarities in debt-mix structure of German and UK firms
but it also detects some important differences. Therefore, the paper concludes that the relation between dependent and explanatory variables is country-dependent. This can be attributed to the differences in corporate governance mechanisms and institutional features of the countries. Research limitations/implications – The limitation mainly has come from data unavailability for public debt. Future research could be to extend the number of countries to have a better idea for the impact of institutional factors on corporate debt-mix. Practical implications – The findings confirm that the debt ownership decision of listed firms is not only the result of their own characteristics but also the outcome of legal and financial environment and corporate governance traditions in which they operate. The way managers decide
about the type of debt financing is not universal. Furthermore, the factors such as liquidation and renegotiation, moral hazard and adverse selection, flotation costs are found to be significantly relevant while deciding the mix of corporate debt. Originality/value – This study offers a unique comparison of the evidence from a bank-based economy (Germany) and a market-based economy (UK) that should have direct implications on the choice between bank debt and public debt. Firms with a long-run debt ownership target attain it through an adjustment process. The authors are not aware of any other study on debt ownership that controls for endogeneity using the GMM technique.
LanguageEnglish
Pages821-847
JournalManagerial Finance
Volume34
Issue number12
Publication statusPublished - 2008

Fingerprint

Debt
Corporate debt
Ownership structure
Public debt
Ownership
Generalized method of moments
Renegotiation
Flotation
Moral hazard
Costs
Adverse selection
Liquidation
Adjustment process
Corporate governance
Private debt
Managers
Design methodology
Hypothesis test
Factors
Regression analysis

Keywords

  • debts
  • public ownership,
  • united kingdom,
  • debt financing
  • private ownership,
  • germany,

Cite this

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abstract = "Purpose – This paper aims to investigate the determinants of choice between private and public debt for British and German listed companies. Design/methodology/approach – The paper is based on three strands of theories: the ‘‘liquidation and renegotiation’’ hypothesis; the ‘‘moral hazard and adverse selection’’ hypothesis; the ‘‘flotation cost’’ hypothesis. The regression analysis was adopted to test these hypotheses. The specific econometric method used for panel data is generalised method of moments (GMM). Findings – The evidence records a few similarities in debt-mix structure of German and UK firmsbut it also detects some important differences. Therefore, the paper concludes that the relation between dependent and explanatory variables is country-dependent. This can be attributed to the differences in corporate governance mechanisms and institutional features of the countries. Research limitations/implications – The limitation mainly has come from data unavailability for public debt. Future research could be to extend the number of countries to have a better idea for the impact of institutional factors on corporate debt-mix. Practical implications – The findings confirm that the debt ownership decision of listed firms is not only the result of their own characteristics but also the outcome of legal and financial environment and corporate governance traditions in which they operate. The way managers decideabout the type of debt financing is not universal. Furthermore, the factors such as liquidation and renegotiation, moral hazard and adverse selection, flotation costs are found to be significantly relevant while deciding the mix of corporate debt. Originality/value – This study offers a unique comparison of the evidence from a bank-based economy (Germany) and a market-based economy (UK) that should have direct implications on the choice between bank debt and public debt. Firms with a long-run debt ownership target attain it through an adjustment process. The authors are not aware of any other study on debt ownership that controls for endogeneity using the GMM technique.",
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The determinants of corporate debt ownership structure : evidence from market-based and bank-based economies. / Paudyal, Krishna; Antoniou, A; Guney, Y.

In: Managerial Finance, Vol. 34, No. 12, 2008, p. 821-847.

Research output: Contribution to journalArticle

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AB - Purpose – This paper aims to investigate the determinants of choice between private and public debt for British and German listed companies. Design/methodology/approach – The paper is based on three strands of theories: the ‘‘liquidation and renegotiation’’ hypothesis; the ‘‘moral hazard and adverse selection’’ hypothesis; the ‘‘flotation cost’’ hypothesis. The regression analysis was adopted to test these hypotheses. The specific econometric method used for panel data is generalised method of moments (GMM). Findings – The evidence records a few similarities in debt-mix structure of German and UK firmsbut it also detects some important differences. Therefore, the paper concludes that the relation between dependent and explanatory variables is country-dependent. This can be attributed to the differences in corporate governance mechanisms and institutional features of the countries. Research limitations/implications – The limitation mainly has come from data unavailability for public debt. Future research could be to extend the number of countries to have a better idea for the impact of institutional factors on corporate debt-mix. Practical implications – The findings confirm that the debt ownership decision of listed firms is not only the result of their own characteristics but also the outcome of legal and financial environment and corporate governance traditions in which they operate. The way managers decideabout the type of debt financing is not universal. Furthermore, the factors such as liquidation and renegotiation, moral hazard and adverse selection, flotation costs are found to be significantly relevant while deciding the mix of corporate debt. Originality/value – This study offers a unique comparison of the evidence from a bank-based economy (Germany) and a market-based economy (UK) that should have direct implications on the choice between bank debt and public debt. Firms with a long-run debt ownership target attain it through an adjustment process. The authors are not aware of any other study on debt ownership that controls for endogeneity using the GMM technique.

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