Working Paper: NBER ID: w23310
Authors: Irem Demirci; Jennifer Huang; Clemens Sialm
Abstract: 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.
Keywords: government debt; corporate leverage; international evidence
JEL Codes: F21; F34; F36; F65; G28; G32; G38; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| euro currency introduction (F36) | corporate leverage sensitivity to local government debt (H74) |
| government debt (H63) | corporate leverage (G32) |
| military spending (H56) | government debt (H63) |
| domestic government debt (H63) | corporate leverage (G32) |