Debt and communications technology diffusion: Retrospective evidence

Abstract

This study has evaluated the relationship between debt in the capital structure of firms and the dynamics of broadband and digital technology adoption in the United States, based on a large dataset on local exchange carriers in the United States over a contemporary historical fourteen year period from 1988 to 2001. Using treatment effects modeling, the impact of debt in impacting the levels of firms’ broadband deployment has been found to be negative and significant. The primary source of debt in the sector has been in the form of arm's-length corporate bonds and the assumptions of the monitoring hypothesis associated with such debt, that lenders, in the face of information and collective actions problems, might not be able to control managers and hence invest less in highly technology-intensive situations, are supported by the data. Additionally, the data set has been split into separate sets for two periods, one between 1988 and 1995, for the period before the Telecommunications Act of 1996 came into force, and the other set between 1996 and 2001, and the results have stayed consistent. A test of the coefficients between the two periods has shown that the negative impact of leverage on broadband deployment has become stronger after the introduction of competition in the sector, and this has suggested that the change in the institutional logics between the two periods has been of material impact in influencing lenders’ perceptions.