Supply of capital and capital structure: The role of financial development

Abstract

We explore the effect of financial development on corporate capital structure and the tightness of financial constraints that firms face. We employ an econometric technique which allows us to explicitly test for convergence in capital structure. This technique increases the power of our statistical tests. In doing so, we identify a group of convergent firms. The driving force of convergence is financial development, which positively affects the firms' leverage ratio. We also identify a group of firms, whose leverage is not affected by financial development, because they are financially constrained.

Credit supply and capital structure adjustments

“…loan contracts (Devos, Rahman, & Tsang, 2017), acquisitions (Uysal, 2011), and the availability of credit lines (Lockhart, 2014). In addition, external factors are also found to affect leverage adjustment, such as macroeconomic factors (Antzoulatos, Koufopoulos, Lambrinoudakis, & Tsiritakis, 2016;Cook & Tang, 2010;Drobetz, Schilling, & Schröder, 2015) and institutional features (Elsas & Florysiak, 2011;Öztekin, 2015;Öztekin & Flannery, 2012).…”

Finance‐inequality Nexus: The Long and the Short of It

“…Underdeveloped credit markets limit access to financial services for the most risky segment of households and firms (Banerjee and Newman 1993), hence, on the extensive margin, financial development alleviates entry barriers and expands the economic opportunities of poorer individuals, thus reducing income inequality (Becker and Tomes 1979, 1986; Galor and Moav 2004; Paulson and Townsend 2004). 2 On the intensive margin, financial development improves the quality of financial services for those who already have access to them, most likely relatively high‐income individuals and well‐established firms (Antzoulatos et al 2016; Greenwood and Jovanovic 1990), 3 thus contributing to more income inequality 4 . The overall impact of financial development is then the superposition of the two margins: some studies find a positive nexus (e.g., de Haan and Sturm 2017; Denk and Cournède 2015; Gimet and Lagoarde‐Segot 2011; Jauch and Watzka 2016; Jaumotte, Lall, and Papageorgiou 2013) while others show that financial development has a negative impact on inequality (e.g., Beck, Demirgüç‐Kunt, and Levine 2007; Hamori and Hashiguchi 2012; Kappel 2010; Naceur and Zhang 2016).…”

“…33 Antzoulatos et al (2016) suggest that as “financial development gathers pace,” larger and more profitable firms with greater access to capital markets, tend to increase leverage more. …”

Finance-Inequality Nexus: the long and the short of it

“…1 Underdeveloped credit markets limit access to financial services for the most risky segment of households and firms (Banerjee and Newman 1993), hence, on the extensive margin, financial development alleviates entry barriers and expands the economic opportunities of poorer individuals, thus reducing income inequality (Becker andTomes 1979, 1986;Galor and Moav 2004;Paulson and Townsend 2004). 2 On the intensive margin, financial development improves the quality of financial services for those who already have access to them, most likely relatively high-income individuals and well-established firms (Antzoulatos et al 2016;Greenwood and Jovanovic 1990), 3 thus contributing to more income inequality. 4 The overall impact of financial development is then the superposition of the two margins: some studies find a positive nexus (e.g., de Haan and Sturm 2017; Denk and Cournède 2015; Gimet and Lagoarde-Segot 2011; Jauch and Watzka 2016; Jaumotte, Lall, and Papageorgiou 2013) while others show that financial development has a negative impact on inequality (e.g., Beck, Demirgüç-Kunt, and Levine 2007;Hamori and Hashiguchi 2012;Kappel 2010; Naceur and Zhang 2016).…”

“…3. Antzoulatos et al (2016) suggest that as "financial development gathers pace," larger and more profitable firms with greater access to capital markets, tend to increase leverage more.…”