Institutions, Financial Markets, and Firms' Choice of Debt Maturity

Abstract

This report examines the maturity of liabilities in firms in thirty developed and developing countries between 1980 and 1991. It finds systematic differences in the use of long-term debt between developed and developing countries, and between small and large firms. The authors attempt to explain the observed cross-country leverage and maturity variations by differences in their legal systems, financial institutions, government subsidy levels, firm characteristics, and in macroeconomic factors, such as the inflation rate and the economy's growth rate. The report provides evidence confirming that firms in developing countries have less long-term debt, even after accounting for their characteristics. This lack of term finance is mainly owing to institutional differences, such as the extent of government subsidies, the different level of development for stock markets and banks, and the differences in the underlying legal infrastructure. The report indicates that while policies that help develop legal and financial infrastructure are effective in increasing firm access to long-term debt, different policies would be necessary to lengthen the debt maturity of large and small firms. Improvements in legal efficacy seem to benefit all firms, although this result is much less significant for the smallest firms, which have limited access to the legal system. Similarly, policies that would help improve the functioning and liquidity of stock markets, would also mostly benefit large firms. In contrast, policies that would lead to improvements in the development of the banking system would improve the access of smaller firms to long-term credit.