Unpacking the impact of inflation on corporate financing : an empirical analysis of bank lending and corporate bond issuance in Europe's major economies
Creators: name: Valterio, Erica
Publisher: name: ZHAW Zürcher Hochschule für Angewandte Wissenschaften
Year: 2023
Subjects: 658.1: Organisation und Finanzen

description: The present investigation poses a significant challenge to the prevailing theories that posit risk-averse behavior among corporations during inflationary periods, with companies resorting to rationing investments and expenditures related to capital financing and debt. In contrast, the study reveals a captivating narrative of companies expanding their production activities and significantly leveraging debt capital compared to pre-inflationary periods. This paper delves into the depths of the matter to truly comprehend the underlying reasons that drive companies' increased debt-taking amidst inflationary pressures. 
Furthermore, the study endeavors to scrutinize the preferences of companies for financing debt during inflationary periods, specifically whether they prefer bank loans or corporate bonds. On this note, the study unearths compelling evidence suggesting that during the present inflationary phase, firms demonstrate a greater propensity for bank debt, particularly in countries such as France and Germany, where the banking sector has not been afflicted by structural crises. In Italy, however, this phenomenon is not readily discernible due to the state of the banking sector and the country's overall economic landscape. At the aggregate level, the fixed effects panel model provides notable insights: a 1% increase in the inflation level corresponds to a 4% increase in loan issuance volumes and a 9.7% decrease in bond issuance volumes. 
Several reasons could have motivated companies to prefer bank debt, including the relative costs of loans, which have now fallen below the average corporate bond yields, as highlighted by an analysis by the Bank of France (Banque de France, 2023). However, other technical aspects may have also played a pivotal role in influencing these preferences, such as the duration of issuance and the flexibility in the conditions for debt repayment. In periods of economic turbulence, characterized by surging demand and skyrocketing material costs, companies often find themselves in urgent need of funds to finance the operative activities, seeking financing options that provide flexibility and allow for penalty-free repayment if economic conditions shift. In this context, bank loans offer a set of technical features that are particularly well-suited to these needs. With faster average issuance times compared to bonds, coupled with the ability to repay the loan early without incurring penalties, bank loans offer companies a level of agility and responsiveness that is highly valued in today's fast-paced and rapidly changing business landscape. Upon analyzing multiple studies conducted by the national banks of the three countries under consideration, a clear trend has emerged indicating a significant surge in demand for short term bank loans. This observation may once again suggest that companies are actively seeking financial instruments that offer greater flexibility, as opposed to corporate bonds whose issuance process is often linked to lengthy bureaucratic procedures and whose maturity frequently exceeds a year (Schildbach, Schattenberg, & Schneider, 2022). 
To gain a more in-depth understanding of these aspects, a T-test was conducted to scrutinize the needs that prompted companies to absorb new debt during the inflationary period. The findings indicate that many companies are requesting bank loans to finance working capital and inventories, suggesting a growing demand for such financing options. This general trend is also supported by an aggregate analysis of 1,646 companies operating in diverse sectors across France, Germany, and Italy, revealing a rise in inventories’ balance sheet positions and an increase in the level of debt concurrent with working capital and revenues. 
The aforementioned evidence is intriguing, revealing how the post-pandemic period saw a surge in aggregate demand across various sectors, prompting companies to operate at maximum capacity. However, challenges such as supply chain slowdowns and bottlenecks have cast doubts on companies' ability to produce and then efficiently deliver finished products to the market. In light of this, many companies have opted to expand their inventories, thereby exerting greater control over production and sales volumes. Moreover, given the expectation that the general price level will continue to ascend, firms are seeking to maximize the margin gap by purchasing goods at current prices, which they can later sell at higher prices amid the ongoing inflationary pressures. This strategy allows companies to further capitalize on the favorable market conditions and potentially reap higher returns. 
Finally, the arduous years of the COVID-19 pandemic have taken a heavy toll on companies' internal resources, including their profits and operating liquidity. As a result, many companies are now turning to external sources of financing to face the challenges presented by the current inflationary landscape, a trend that is being fueled in part by government aid in the form of non-repayable loans and bank loan guarantees for struggling companies. By leveraging these external funding sources, companies can bolster their financial resilience and position themselves for long-term success in an uncertain and rapidly evolving economic climate.