State Ownership and Debt Choice: Evidence from Privatization

Abstract

In this paper we examine the link between state ownership and the choice of public debt versus bank debt in an international context. Using a large sample of privatized firms from 62 countries over the 2001-2014 period, we find that state ownership is significantly positively associated with the use of bank debt financing, suggesting that privatized firms benefit from the soft budget constraint associated with state ownership. This result holds after conducting several endogeneity and robustness tests. We further find that the positive relation between state ownership and bank debt reliance is more pronounced in countries with high government ownership of banks, high corruption in bank lending, a left-oriented government, and a collectivist national culture, which provides additional support for the soft budget constraint view. Finally, in external validity tests we find that state ownership affects other aspects of debt structure such as debt maturity and debt security.