[Po iCY RESEARCH WORKING PAPER 1 699

# Summary findings

Schiantarelli and Sembenelli empirically investigate the determinants and consequences of the maturity structure of debt using data from a panel of UJ.K. and Italian firms.

They find that in choosing a maturity structure for debt, firms tend to match assets and liabilities, as both conventional wisdom and some recent theoretical models suggest. They conclude that more profitable firms (as measured by the ratio of cash flow to capital) tend to have more long-term debt. T his finding is consistent with the dominant role played by firms' fear of liquidation and loss of control associated with short-term debt. It may also reflect the willingness of financial markets to provide long-term finance only to quality firms.

The data do not support the hypothesis that short-term debt, through better monitoring and control, boosts efficiency and growth. If anythirng, the results support the opposite conclusion. In both countries the data suggest a positive relationship betweeni initial debt maturity and the firms' subsequent medium-term performance in terms of profitability and growth in real sales. In both countries total factor productivity depends positivelv on the length of debt maturity when the maturity variable is entered both contemporaneously and lagged.

But in Italy the positive effect of the length of maturity on prodiuctivity is substantially reduced or even reversed the larger is the proportion of subsidized credit.

Schiantarelli and Sembenelli document the relationship between firms' characteristics and their choice of shorter or long-term debt by estimating a maturity equation and interpreting the results in light of insights from theoretical literature, and by analyzing the effects of maturity on firms' later performance in terms of profitability, growth, and productivity. They estimate a Cobb-Douglas production function and assess how total factor productivity depends on the degree of leverage and the proportion of longer- and shorter-term debt. They also analyze the relationship between firms' debt maturity and investment by estimating an accelerator type of investment eqLuation, augmented by financial variables.

- - This paper a product of the Finance and Private Sector Development Division, Policy Researchi Department is part of a larger effort in the department to study the effects of financial structiure on economic performance. The study was funded by the Bank's Research Suppor-t Budget under research project "Term Finance: Theory and Evidence" (RPO 67962). Copies of this paper are available free from the World Bank, 1818 FH Street NW, Washington, DC 20433. Please contact Bill Moore, room N9-038, telephone 202-473-8526, fax 202-522-1155, Internet address bmoore@vworldbank.org. January 1997. (40 pages)

_rhe Policy Research Working Paper Series disseminiates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings_ **_out_** _quickly, ei'en if the presentations are less than fully polished. The papers carry the names of the authors and should he cited accordingly. Tlhe findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do_ **_not_** _necessarily represent the_ **_vieuw_** _of_ **_the_** _World Bank, its Executive Directors, or the countries they represent._ Produced by the Policy Research Dissemination Center