The Determinants of Corporate Debt Ownership Structure: Evidence from Market-based and Bank-based Economies

Abstract

This paper offers a comparative analysis of the determinants of the corporate debt ownership structure in a bank-oriented economy (Germany) and market-oriented economy (the UK). Using GMM estimators, we control for the problems of endogeneity, heteroscedasticity, normality, simultaneity and measurement errors that are common in firm-level panel data. The results show that the firms in both countries adjust their debt ownership structure towards their target levels - British firms being the swiftest. The findings confirm the validity of the liquidation and renegotiation hypothesis and the flotation cost hypothesis in both countries. However, the moral hazard and adverse selection hypothesis receives strong support in the UK but not in Germany. Moreover, the role of control factors (market related variables) in determining the choice of the lender is country dependent. Therefore, the debt ownership structure of a firm is influenced by both the firm-specific factors and the financial systems and corporate governance traditions in which the firm operates.