Corporate Indebtedness Research Articles

Pandemic effect on company’s sustainability debt policy: The case of Portugal

Amid the relentless grip of the COVID-19 pandemic, sustainability has emerged as a paramount concern across global economies. As businesses grapple with unprecedented challenges, the imperative for sustainable practices in corporate finance becomes increasingly evident. Throughout this crisis, companies have faced staggering financial strains, with diminished turnovers and escalating operational costs pushing many to the brink of collapse. In response, governments worldwide have provided vital support, albeit often insufficient, underscoring the necessity for sustainable mechanisms of intervention. Central to this discourse is an examination of how companies have adapted their financing policies amidst the pandemic’s tumult. Government-backed credit facilities have served as a critical lifeline for numerous businesses, emphasizing the need for sustainable financial instruments readily deployable in times of crisis. Concurrently, moratoriums on existing credit obligations have offered temporary relief, albeit with looming concerns regarding heightened corporate indebtedness. Moreover, the pandemic’s aftermath has witnessed a pronounced uptick in corporate borrowing, compounded by surging interest rates. This confluence underscores the exigency for companies to adopt sustainable financial strategies, mindful not only of short-term exigencies but also the enduring ramifications on financial stability. In navigating these challenges, a holistic approach to sustainability is imperative. Governments must ensure robust support mechanisms, while companies must proactively seek sustainable financing solutions. Concurrently, stakeholders must meticulously weigh the long-term repercussions of financial policy adjustments, thereby fortifying corporate resilience against future crises while safeguarding the stability of the global economy. In essence, the COVID-19 pandemic has underscored the critical imperative for sustainability in corporate finance. By heeding this call and embracing sustainable practices, businesses can navigate crises with greater resilience, ensuring not only their survival but also the enduring stability of the economic landscape.

Corporate Debt Dynamics: Sectoral Clustering Analysis Using NACE Classification in Slovakia

Research background: Many authors are currently exploring the impact of the industry on the financial structure of enterprises since there are statistically significant differences across various sectors, exposing the industry as a critical factor influencing corporate indebtedness. Clusters of sectors with homogeneous patterns of indebtedness and comparable levels of debt in various economic conditions may be determined, and, therefore, firms and their debt levels should be systematically examined and evaluated. Purpose of the article: The main aim of this paper is to evaluate the level of debt in the Slovak environment on a sample of 19,480 firms from various sectors and to identify the relationships among them to identify sectors with homogeneous patterns of indebtedness and, consequently, comprehend which sectors are the most stable and independent. Methods: Because NACE classification provides a framework for gathering and presenting statistical data based on many economic sectors, the number of input data was reduced based on cluster analysis. Using Ward's hierarchical clustering method using squared Euclidean distance, selected indebtedness ratios were used to define the sectors with comparable debt levels. To determine if there were statistically significant differences between the calculated debt ratios related to the economic sector, the Kruskal-Wallis test was performed. Subsequently, as the results indicated significant differences across various indebtedness ratios, a post hoc analysis was performed. Findings & Value added: A group of NACE activities in which enterprises are sufficiently comparable that it is appropriate to evaluate their debt levels using the chosen indebtedness ratios are considered to be in sectors C, F, G and H, which included to tertiary sector, while the sectors K, R and S may also be grouped in one cluster, while form the secondary sector. The key relevance of our findings is the benchmarking of selected sectors about indebtedness, which may be used to further examine their growth in each of the V4 nations, which is an essential area for the evolution of the European economy as a whole. Studies considering a relatively significant amount of capital structure determinants may be beneficial to owners and managers, regulators, and financial institutions since debt policy affects firm performance, value, and survival.

Determinants of Corporate Indebtedness in Portugal: An Analysis of Financial Behaviour Clusters

Corporate indebtedness is a powerful tool in determining a company’s financial health with impacts on its image and reputation. The main objective of this research is to study the determining factors in corporate indebtedness in Portugal. It also has the secondary objectives of creating clusters of companies’ behaviour in relation to the use of credit and verifying their differences in relation to the characteristics of the companies. It uses a quantitative methodology based on a questionnaire survey of 1957 Portuguese companies. The results of the factor analysis show the formation of six determining factors in corporate indebtedness, namely the negotiating relationship with banks, financing, cycle and indebtedness, company operating performance, guarantees used to obtain bank financing and financing risk analysis as well as secondary forms of bank financing. The application of cluster analysis to the six factors formed led to the classification of companies into three clusters: the resilient financial cluster, the operational excellence cluster and the strategic financial cluster. There are several statistically significant differences in the corporate financing factors in relation to the clusters to which they belong. The evidence of the factors and clusters explaining company financing provides insights for improving credit access practices and for implementing public policies that facilitate access to credit and promote economic development.

Financialisation, shareholder value orientation, and the decline of trade union membership in the EU

This article shows that an orientation towards shareholder value and corporate indebtedness at non-financial firms have been negatively associated with union density in the EU over the past 21 years. We argue that the financialisation of non-financial firms makes them prioritise their ‘external (economic) balance’ at the expense of a cooperative ‘internal equilibrium’ model. In other words, corporate financialisation pushes non-financial firms to shift to non-participatory, market-based HR systems that directly undermine the role of trade unions. This study examines this corporate financialisation-induced shift within the EU in the wake of deeper economic integration since 1999 and provides panel data econometric evidence that it has significantly undermined union membership.

Credit term structure and corporate indebtedness

At present, one of the major issues that seriously plague the high-quality development of the real economy globally is the current prevalence of high indebtedness and high leverage, as well as the financing problems of manufacturing enterprises. This paper empirically investigates the extent of the impact of bank credit term structure on corporate indebtedness and its mechanism using Chinese provincial panel data from 2003-2020 as the research sample. The results show that, firstly, long-term bank credit term structure can reduce corporate liabilities and mitigate corporate liability risks, and this result still holds after endogeneity analysis and robustness tests such as lagging credit term structure by one period, using instrumental variable method, and replacing explanatory variables. Second, income effect and innovation effect are two important mechanisms by which credit term structure affects corporate liabilities. Finally, the heterogeneity results show that the credit term structure of firms in the central and western regions has a more pronounced effect on corporate indebtedness than in the eastern regions. Therefore, this paper suggests optimizing the credit term structure, promoting the effective support of credit for the sustainable development of the real economy, taking full account of regional differences, and creating a more favorable environment for enterprise financing and development.

The Relevance of Sectoral Clustering in Corporate Debt Policy: The Case Study of Slovak Enterprises

The processing and transformation of natural resources into completed and semi-finished products is the primary function of industry in each nation’s economy. There is no denying the significance of industry and sectoral classification of the economy, but the slow development and extension of one industry could have resulted in the advancement of other sectors that are now a part of contemporary communities. Since there are statistically significant differences between various industries, numerous authors are currently investigating the impact of the industry on the financial structure of firms, revealing the industry as a crucial determinant of corporate indebtedness. Thus, the main aim of this study is to determine the debt level of a sample of 4237 enterprises operating in the market in the period of 2018–2021 from various sectors using eight debt indicators, as well as to identify relationships between them, which may help to reveal sectors with homogeneous patterns of indebtedness (using the cluster analysis) and thus understand which sectors are the most stable and independent. The Kruskal–Wallis test is then used to determine if there are statistically significant differences between the calculated ratios related to the economic sector. Based on the results, it can be concluded that the choice of financial structure is significantly influenced by the industry. Financial performance and indebtedness indicators are quantitative statistics used to assess, monitor, and forecast company or sectoral financial health. They act as instruments for business insiders and outsiders to assess a company’s performance, particularly in comparison to competitors, and to pinpoint its strengths and weaknesses, making the outputs of this study important for all types of stakeholders.

Does the inverted U-shape between corporate indebtedness and investment hold up for emerging markets? Evidence from Türkiye

While corporate indebtedness has increased substantially in emerging countries over the last decade, the literature on the negative consequences of this large build-up of debt on real consequences is very limited. In addition, they provide mixed results and suffer from the lack of representativeness of their samples, which can be attributed to data availability. Unlike the previous studies, this study investigates the link between corporate indebtedness and investment by utilizing a novel firm-level data covering the universe of all incorporated manufacturing firms in Türkiye over the last decade. The results of the panel regression model with multi-dimensional fixed effects provide significant evidence of an inverted-U relationship between indebtedness and investment, indicating that leverage increases investment up to a certain level, and after that, further increase in leverage has an adverse impact on investment. This non-monotonic relationship is evident for all firm size groups. Conspicuously, the indebtedness level that impedes investment is significantly lower for Small- and Medium-Sized Enterprises (SMEs) than large firms, which supports the arguments that small firms are more likely to be affected by debt overhang. Results also reveal that firms holding more cash can sustain higher levels of debt without hurting investment activity. This is also the case for high capital-intensive firms and exporters. Findings of this paper highlight the importance of policies to make equity financing more attractive, incentivize the uptake and provision of equity capital from private investors, and deepen the capital markets.

Discussion of “The Asymmetric Impact of COVID-19: A Novel Approach to Quantifying Financial Distress across Industries”

The COVID-19 pandemic crisis and the associated lockdown measures have exerted significantly adverse effects on corporate sectors globally. Archanskaia et al. (2023) provide a novel empirical strategy to timely assess corporate financial distress in the EU. The contribution is two-fold. First, this paper’s notion of financial distress considers both the equity position and corporate indebtedness. Second, the methodology proposed in this paper allows the authors to estimate corporate financial distress in the EU at a highly granular level and link micro-level simulations to sectoral macroeconomic outcomes. The methodology employed by Archanskaia et al. (2023) consists of three steps. First, the authors apply a nowcasting model to acquire monthly industrial turnover data. Second, they feed the obtained monthly industrial turnover into a profit-generating process via an accounting identity to estimate monthly firm profits at the firm level. Third, the authors use the estimated firm profits with a snapshot of information on pre-existing liquid assets to deduce the firm-level liquidity needs and the depletion of equity through the focus period during COVID-19. These estimated results on firm equity position and indebtedness enable the authors to quantity corporate financial distress in the EU via various angles (e.g., country-level heterogeneity, industry heterogeneity, and the targeting of COVID support policies). The primary advantage of this approach is that it deals with large datasets at the granular level and produces firm-level results almost in real-time. Therefore, it can help policymaking track the effects of crises over time. However, one can quickly critique this three-step approach for its susceptibility to the usual Lucas critique. That said, since the objective here is to estimate firm-level financial distress, a large structural model being more or less aggregate in nature, though able to mitigate the Lucas critique concern, will encounter significant challenges in estimating firm-level results with the requisite level of granularity offered by the available data. Therefore, I broadly concur with the authors’ position that ‘the specific contribution of this paper consists in striking a better balance between the need to carry out a multi-country evaluation of the pandemic’s effects on industrial activity in a strongly integrated region like the EU and the difficulty of capturing time, industry, and country variation in turnover with sufficient granularity.’

ЗАДЛЪЖНЯЛОСТТА НА НЕФИНАНСОВИТЕ ПРЕДПРИЯТИЯ В БЪЛГАРИЯ ПРЕЗ 2014 – 2020 г.

This publication presents the results of a descriptive analysis of the indebtedness of non-financial enterprises in Bulgaria during the period 2014 – 2020. The information array used was provided by the NSI. The research methodology includes the use of financial and statistical methods through which the general state of corporate indebtedness among non-financial enterprises in the country is established, as well as the main characteristics of indebtedness relationships with widely accepted absolute and relative financial indicators. The research establishes an improvement in the main coefficients for measuring the indebtedness of non-financial enterprises during the period, as well as that the level of their corporate liabilities does not represent a brake on economic growth in Bulgaria.

How Particular Firm-Specific Features Influence Corporate Debt Level: A Case Study of Slovak Enterprises

Debt financing is related to borrowing funds from enterprises and investors through bonds, banks, or financial institutions. Interest in debt financing has been rapidly growing in recent years and is now considered one of the most common ways an enterprise can increase its capital to run its business. However, the use of a large amount of debt is associated with the management of corporate indebtedness, requiring the tracking of the entire financial performance of the company. The chief objective of this study was to determine and assess the indebtedness level of enterprises operating in the Slovak Republic using 12 crucial debt ratios and then to clarify whether there are statistically relevant dissimilarities in corporate debt as a result of the firm size and its legal form, representing relevant company-specific features having an impact on corporate indebtedness. Subsequently, a more elaborate analysis addressing statistically relevant dissimilarities between separate indebtedness ratios in relation to the size of the company and its legal form was carried out by deploying the nonparametric Kruskal–Wallis test. We leveraged the Bonferroni correction to specify where stochastic ascendancy occurs. The Kruskal–Wallis test result revealed statistically significant dissimilarities in the values of debt ratios as a result of the firm size and the legal form of the company, which confirmed previous results indicating the most relevant determinants shaping corporate debt. Recognizing the repercussions of firm size and legal form on the corporate debt policy plays an important role, as these company-specific features may be perceived as proxies for the default likelihood or for the volatility of corporate assets, making the regulatory process of creditors and stakeholders straightforward. The findings confirmed the theories of numerous researchers who claimed that firm size and legal form are critical aspects of corporate debt.

Corporate indebtedness and profitability of a private school listed on the Lima Stock Exchange (LSE)

Indebtedness is important for companies to have the necessary resources for an investment needed to increase their market share. The main objective was considered to analyze the connection of indebtedness with the profitability of a school listed on the LSE, 2017-2021. The methodology considered was quantitative, basic, longitudinal, descriptive and correlational, the documentary analysis was applied to the financial statements of a school listed on the BVL for the periods 2017-2021. The data achieved showed that indebtedness reached a non-parametric test with profitability and return on equity since the p-value was less than 0.05, consenting to accept the alternate hypothesis, and a Pearson is -0.781 and -0.955. On the other hand, indebtedness with return on net sales and return on assets, the data were parametric since the p-value was higher than 0.05, allowing in this part to accept the null hypothesis, and a Pearson was 0.738 and 0.684. It is concluded that by not carrying out an exhaustive analysis, considering the true needs of the company and the demands of the target public, the financial decision making will always be wrong, leading to short-term indebtedness affecting the financial structure of the company, since its assets will not be able to meet the monetary obligation acquired, since its current liabilities considerably exceed the company's capacity to meet its financial obligations.

Research on Corporate Indebtedness Determinants: A Case Study of Visegrad Group Countries

Debt financing is arguably the most important source of external financing for enterprises and has become popular in recent years. Corporate debt is related to the monitoring of corporate indebtedness, which is a necessary part of evaluating the overall financial performance of an enterprise and will occur if an enterprise does not have enough equity. However, rising indebtedness can be a difficult financial situation for enterprises in the form of default and an inability to meet their emerging liabilities. The main aim of this paper is to perform a debt analysis of enterprises operating in the Visegrad Group countries and subsequently examine whether firm size and legal form have a statistically significant impact on selected indebtedness indicators. Firstly, it was necessary to perform a debt analysis using 10 debt ratios. Subsequently, the nonparametric Kruskal–Wallis test was used to perform a more detailed analysis focused on examining statistically significant differences in individual indebtedness ratios based on firm size and legal form. Bonferroni corrections were applied to detect where stochastic dominance occurred. The Kruskal–Wallis test results reveal statistically significant differences in debt ratios in Visegrad Group countries, confirming the impact of firm size and legal form on calculated debt ratios. Recognizing the impact of several determinants on corporate debt is critical because these firm-specific features may be interpreted as proxies for default probability or the volatility of corporate assets, which may simplify the decision-making processes of creditors and stakeholders.

The reflux phase in monetary circuit theory and stock–flow consistent models

Stock–flow consistent (SFC) modelling and monetary circuit theory (MCT) have many similarities. However, an important difference concerns the reflux phase, during which the credits issued by banks are repaid. This phase is constitutive of MCT models, but does not generally appear explicitly in SFC models. The authors propose here to develop an SFC model in which the bank loans issued at the beginning of a period are explicitly repaid at the end of it. The repayment of long-term bank loans financing investments will then represent a leakage outside the monetary circuit and affect the level of aggregate demand and the dynamics of the model. The authors show that considering these repayments could have a lasting effect on corporate profits, corporate indebtedness, and growth of production. This result suggests that it could be interesting to focus more on the reflux phase within SFC models, taking inspiration from MCT.

Highlighting Asymmetries: Re-Examining the Firm-Level Impacts of Pro-Market Reforms in Latin America

Impacts of pro-market reforms on profitability have been investigated for more than two decades, but accumulated results still prove inconclusive. While there seems to be consensus highlighting why pro-market reforms would lead to higher profitability, findings remain mixed. We refine past research by 1) employing causal analysis methods (specifically, vector autoregression and impulse response functions) that improve upon previous techniques 2) using more appropriate sampling of countries and of firms (specifically, multiple countries that are comparable and that illustrate opposing directions of reforms), and 3) including additional key financial indicators as dependent variables to parse out the complex impacts of the reforms . Using firm-level data from 1,248 publicly listed firms from seven Latin American countries (2000-2016), our results offer novel insights. Interestingly, our results do not demonstrate a statistically significant result for the impact of pro-market reforms on profitability (return on sales). However, our findings do indicate a positive relationship between pro-market reforms and operational efficiency (reduction in administrative and selling expenses) as well as between pro-market reforms and financial leverage (corporate indebtedness and interest expenses). Understanding these asymmetric effects, while also considering pro-market reversals, offers a more finely variegated lens to extant literature.

The Impact of Firm Size on Corporate Indebtedness: A Case Study of Slovak Enterprises

Abstract Research background: Debt is considered a normal part of enterprises these days. If enterprises do not have enough equity, they will start to use a large amount of debt which is mainly associated with indebtedness. Rising indebtedness can be a difficult financial situation for business entities in the form of default and inability to meet their liabilities. Purpose: The main aim of this paper is to perform a debt analysis of enterprises operating in sectors that are considered leading in the conditions of Slovakia, such as the manufacturing and construction sector, and subsequently, to examine whether the size of the enterprise has a significant impact on selected indebtedness ratios. Research methodology: Firstly, the debt analysis was performed using the six selected indebtedness indicators on a sample of 846 enterprises. Secondly, a more detailed analysis, focused on examining the existence of statistically significant differences between individual indebtedness ratios concerning the size of the enterprise, was realized using the non-parametric Kruskal-Wallis test. At the end of the research, the Bonferroni corrections were used to identify where the stochastic dominance occurred. Results: The impact of the enterprise’s size on the calculated indebtedness indicators is confirmed by the results of ANOVA, based on which it can be argued that statistically significant differences between the calculated indebtedness indicators exist between large and small enterprises, as well as an inequality of medians between large and medium-sized enterprises. As a result, the median values of the debt ratios of small and medium-sized enterprises are the same. Novelty: The contribution of this paper is a new feature of the application of debt analysis for the evaluation of corporate performance. There are only a few papers in Slovakia that focus in detail on an analysis of the indebtedness of individual enterprises and with an examination of the determinants that affect this indebtedness, which is, however, an added value of our contribution.

Surplus and capital profitability in the Spanish economy, and comparison with the Euro area. A political economy approach

ABSTRACT The article studies the evolution of both surplus and profit rates in the Spanish economy during the phase of the housing bubble, the subsequent crisis and the recent economic recovery (1995─2017), comparing as well core and peripheral economies of the Eurozone. From various methodological approaches and showing several indicators, this paper finds an underlying deep profitability crisis and an alarming drop in what we call the productivity of surplus, without reaching previous levels of profitability at the end of the period. This path has been offset by a reduction in interest rates, which promoted corporate indebtedness. The huge decrease of profitability in Spain is however consistent with its peripheral insertion into the Euro area. In opposition, the more advanced economies of the region were able to keep the level of capital profitability and even increasing the volume of surplus.

Firm-level Impacts of Pro-Market Reforms: Latin America as a Laboratory

The impact of pro-market reforms on the profitability of companies has been investigated for more than two decades, but accumulated results are still inconclusive. While there has been general agreement in terms of the reasons why pro-market reforms would be expected to lead to higher profitability, findings across studies have been mixed. The present study improves over past research by employing causal analysis methods (specifically, vector autoregression and impulse response functions) and by using more appropriate sampling of countries and of firms (specifically, multiple countries that are comparable and that illustrate opposing directions of reforms). We use firm-level data from 1,248 publicly listed firms in seven Latin American countries, 2000-2016. Although our results were not statistically significant as regards the relationship between pro-market reforms and firm profitability (return on sales), our findings do indicate a positive relationship between pro-market reforms and operational efficiency (reduction in administrative and selling expenses) as well as between pro-market reforms and financial leverage (corporate indebtedness and interest expenses), as expected.

How should risk professionals think about the rise in corporate indebtedness?

The COVID-19 pandemic has led to significant disruptions to economic activity, accompanied by a substantial increase in companies’ debt loads. The unique nature of this crisis and the quantities of debt accumulated pose challenges for assessing the risk implications. It is important to start with a clear macroeconomic perspective and benchmark; importantly, while lockdown measures have led to significant economic disruption, the medium-term impact is likely to be smaller than the 2007/2008 Global Financial Crisis. At the same time, financial market access for issuers was robust last year, with issuance surpassing pre-COVID-19 averages. Similarly, current refinancing profiles indicate that near-term liquidity risks are not pervasive across the business sector as a whole. Given that past corporate deleveraging across advanced economies (AEs) has typically been driven by profit growth, it may take several years for debt metrics to unwind after the pandemic has been brought under control. Against this broad backdrop, there are significant differences visible across sectors: one important differentiator is the rise in gross versus net debt, and the relative evolution of these metrics will provide a useful indicator as the pandemic continues. Finally, there is little sign that the extraordinary fiscal support provided by AEs has led to heightened concerns about sovereign risk among forward-looking investors, with investors not demanding higher yields despite the unexpected higher debt loads. This means that simply assuming support will remain in place until the pandemic has subsided should be sufficient, at least until investor perceptions change significantly.

The Great Debt Divergence and its Implications for the Covid-19 Crisis: Mapping Corporate Leverage as Power

ABSTRACT The COVID-19 pandemic has amplified longstanding concerns about mounting levels of corporate debt in the United States. This article places the current conjuncture in its historical context, analysing corporate indebtedness against the backdrop of increasing corporate concentration. Theorising leverage as a form of power, we find that the leverage of large non-financial firms increased in recent decades, while their debt servicing burdens decreased. At the same time, smaller firms experienced sharp deleveraging alongside increasing debt servicing costs. Crucially, smaller corporations also registered severe losses over this period, while large corporations remained profitable, and in fact doubled their net profit margins from the early-1990s to the present. Taken together, the results from our mapping exercise uncover a series of dramatic changes in the financial fortunes of large versus smaller firms in recent decades, a phenomenon we refer to as the great debt divergence. We explain this divergence with reference to the dynamics of power in the era of ‘shareholder capitalism’, and we argue that the US political economy in the post-COVID 19 world is likely to resemble the pre-COVID 19 one, only with more market turmoil, more concentration, more inequality, and even less investment.

Effects of the degree of financial constraint and excessive indebtedness on firms’ investment decisions

The aim of this paper is to provide empirical evidence of the importance of financial variables in explaining differences in investment rates among firms. The main contributions of the study are twofold: the use of a variable that approximates the degree of financial constraint, and the effect of indebtedness on investment is allowed to be non-linear. The empirical application to the case of Spain is of interest because of the large proportion of SMEs among Spanish firms (SMEs being highly dependent on bank financing) and the drastic tightening of credit conditions in Spain during the banking crisis. The results provide evidence of the impact of financial constraints on firms’ investment behavior—an impact distinct from, and far greater than, that of indebtedness. Overall, above a debt-to-asset ratio of 53%, the negative impact of indebtedness increases. The impact increased significantly after the financial crisis, suggesting that when dealing with highly indebted firms, banks became more risk averse, thus further constraining access to credit. Conversely, for large, most productive, and exporting companies, leverage has a positive effect, although this effect decreases with indebtedness. From an economic policy point of view, the results show the importance of banking regulation in preventing corporate indebtedness from reaching levels where it becomes a drag on investment.