Corporate Debt and Financial Balance Sheet Adjustment: A Comparison of the United States, the United Kingdom, France and Germany

Abstract

The level of UK corporate debt directly affects financial stability in the United Kingdom because a significant amount of the exposure of the UK financial system is to UK corporates. Our paper provides a comparison of the determinants of corporate debt in the United States, the United Kingdom, France and Germany. The comparison serves to benchmark our findings about the determinants of UK corporate debt. In addition, the UK financial sector is significantly exposed to the corporate sectors in the United States, Germany and France. The model assesses the contribution of investment, acquisitions, cash flows and market-to-book values to the determination of debt, and also the tendency of debt to revert to its optimum level. Debt was found to be positively related to the financing needs of the firm, and the optimum level of debt to be negatively related to the market-to-book ratio. This casts some light on the procyclicality of debt. It suggests the growth of debt in a boom is explained by the increase in financing needs; and this more than offsets the fall in the optimum level of debt associated with the rising market-to-book value. In addition, we found that it may be expected that, in a boom, German and US debt will rise above the optimum level by more than in the United Kingdom and France - responding to the higher levels of investment and acquisitions. And in a slowdown, when adjusting back down to the optimum, German and US debt tends to be paid down more slowly.