metadata: authors: 0: author: Demirguc-Kunt,Asli
1: author: Martinez Peria,Maria Soledad
2: author: Tressel,Thierry
count: World
docna: 0: docna: The impact of the global financial crisis on
            firms' capital structure
docty: Policy Research Working Paper
subtopic: Social Policy,Legal Products,Judicial System Reform,Common Property Resource Development,Financial Regulation & Supervision,International Trade and Trade Rules,Legal Reform,Financial Economics,Legislation,Regulatory Regimes,Finance and Development
abstracts: cdata!: Using a data set covering about 277,000
            firms across 79 countries over the period 2004-11, this
            paper examines the evolution of firms' capital
            structure during the global financial crisis and its
            aftermath in 2010-11. The study finds that firm leverage and
            debt maturity declined in advanced economies and developing
            countries, even in countries that did not experience a
            crisis. The deleveraging and maturity reduction were
            particularly significant for privately held firms, including
            small and medium enterprises. For small and medium-size
            enterprises, these effects were larger in countries with
            less efficient legal systems, weaker information-sharing
            mechanisms, shallower banking systems, and more restrictions
            on bank entry. In contrast, there is weaker evidence of a
            significant decline of leverage and debt maturity among
            firms listed on a stock exchange, which are typically much
            larger than other firms and likely benefit from the
            "spare tire" of easier access to capital market financing.
repnme: repnme: The impact of the global financial crisis
            on firms' capital structure
display_title: The impact of the global financial
            crisis on firms' capital structure
listing_relative_url: /research/2015/12/25705513/impact-global-financial-crisis-firms-capital-structure
topicv3: Justice m1326106 840,Personal Property Rights m1326571 1907,Trade m1326924 698,Finance and Growth m1327404 1081,Trade Guarantees m1505111 3906
publishtoextweb_dt: 2015-12-21T00:00:00Z
no_of_pages: 60
author_keys: 0: author_key: 94122
1: author_key: 321097
2: author_key: 539936
model_extractions: WPS7522 Policy Research Working Paper 7522 The Impact of the Global Financial Crisis on Firms’ Capital Structure _Asli Demirguc-Kunt Maria Soledad Martinez-Peria Thierry Tressel_ Development Research Group December 2015
Policy Research Working Paper 7522

# **Abstract**

Using a data set covering about 277,000 firms across 79 countries over the period 2004–11, this paper examines the evolution of firms’ capital structure during the global financial crisis and its aftermath in 2010–11. The study finds that firm leverage and debt maturity declined in advanced economies and developing countries, even in countries that did not experience a crisis. The deleveraging and maturity reduction were particularly significant for privately held firms, including small and medium enterprises. For small and medium-size enterprises, these effects were larger in countries with less efficient legal systems, weaker information-sharing mechanisms, shallower banking systems, and more restrictions on bank entry. In contrast, there is weaker evidence of a significant decline of leverage and debt maturity among firms listed on a stock exchange, which are typically much larger than other firms and likely benefit from the “spare tire” of easier access to capital market financing.

This paper is a product of the Development Research Group. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The authors may be contacted at ademirguckunt@ worldbank.org, mmartinezperia@worldbank.org, and ttressel@worldbank.org.

_The Policy Research Working Paper Series disseminates 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, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent._ Produced by the Research Support Team
# The Impact of the Global Financial Crisis on Firms’ Capital Structure<sup></sup>

Asli Demirguc‐Kunt, Maria Soledad Martinez‐Peria and Thierry Tressel Keywords: capital structure; corporate debt; global financial crisis JEL: F65, G01, G30

>  Asli Demirguc‐Kunt is the Director of the Development Research Group at The World Bank. Maria Soledad Martinez Peria is a Research Manager at the Development Research Group of The World Bank. Thierry Tressel is a Lead Economist at The World Bank. We are grateful to Jeanne Verrier and Nan Zhou for excellent research assistance. Corresponding author: Thierry Tressel, The World Bank, 1818 H St., N.W., Washington, D.C. 20433, Email: ttressel@worldbank.org.
# I. Introduction

The collapse of Lehman Brothers in September 2008 had tremendous effects on financial markets across the globe. What started as a US crisis spread rapidly across both advanced and developing countries. It was transmitted worldwide through financial markets, international banks and trade links, and affected many economic sectors (Imbs, 2010; Ahn, Amiti and Weinstein, 2011; Cetorrelli and Goldberg, 2011; Chudik and Fratzscher, 2012; IMF, 2013).

These events offer an important opportunity to study how financial and macroeconomic instability affect the capital structures of firms. How did firms’ capital structures evolve after the onset of the Global Financial Crisis in 2008? Were all firms affected equally or were privately held firms, especially small and medium‐sized enterprises (SMEs), especially hit? Did capital structures change only in the countries that experienced a banking crisis, or did they change in many countries, depending on their specific institutional, financial, and macroeconomic characteristics? We particularly focus on two characteristics of firms: market access and size. It is important to distinguish between firms that are publicly‐listed and privately‐held, because the former are likely to enjoy better access to capital market financing than the latter. Importantly, greater information availability in being a listed firm may also mitigate the reduction of bank credit during a crisis. In contrast, an unlisted SME’s access to external finance is more likely to depend on specific banking relationships relative to other firms, and, therefore, may be more severely affected by negative bank credit supply shocks due to their intrinsic opaqueness.

This paper examines these questions by relying on a unique firm‐level data set covering more than 270,000 firms operating in 79 countries during the period 2004‐2011. We study how 2
firms’ capital structures evolved during the onset of the global financial crisis in 2008‐2009, and its immediate aftermath in 2010‐2011, which coincided with sovereign and banking crises in euro area countries. We characterize the evolution of the ratio of total debt to total assets (leverage), the ratio of long‐term debt to total assets (long‐term leverage), and the ratio of long‐term debt to total debt (maturity composition), after accounting for standard firm characteristics that have been identified in the literature as important determinants of capital structures (Harris and Raviv, 1991; Rajan and Zingales, 1995; Demirguc‐Kunt and Maksimovic, 1999; Booth et al., 2001). In particular, we examine how the capital structure of SMEs, large privately owned firms, and publicly listed firms behaved during the global crisis and its aftermath. Next, for privately‐held firms and SMEs, where we observe the most significant changes, we also investigate the extent to which country characteristics explain the evolution of firms’ capital structures since the global financial crisis.

Theory suggests that a financial crisis may impact the capital structure of firms through different channels. During a crisis, as uncertainty and risk rise and expected returns decline, both lenders and borrowers become reluctant to lock‐in capital in long‐term investments. From the perspective of the lenders, given a rise in default probabilities, the term premium at which they are willing to lend increases significantly during a crisis, which makes long‐term debt less attractive relative to short‐term debt (Gürkaynak and Wright, 2012; Dick, Schmelling and Schrimpf, 2013). Financial intermediaries with impaired balanced sheets may also strengthen their lending margins and increase their term premium even more. As uncertainty or risk increases and business prospects become more uncertain, firms that are unable to commit to an aggregate maturity structure may also reduce their debt maturity and leverage. For example in 3
the “rat race” capital structure model of Brunnermeier and Oehmke (2013), high volatility increases firms’ incentive to shorten the maturity of debt, in spite of the high roll‐over costs associated with short‐term debt, because doing so dilutes the pay‐offs of long‐term investors. They also show that, if firms value financial flexibility during volatile economic conditions, they will be less likely to enter into long‐term contracts with covenants, and the demand for long‐term debt will decline.<sup>1</sup> Thus, during periods of economic crisis, new issuance of long‐term debt may decline and any new debt issues would have shorter maturities.

The maturity composition of corporate debt is important because it determines the extent to which assets are financed by liabilities that expose the firm to rollover risks. Hence, a decline in the maturity of corporate debt shifts rollover risks to firms and away from their lenders, and these refinancing risks may have a negative impact on long‐term productive investments and firm growth (Milbradt and Oehmke, 2014). For example Duchin, Ozbas, and Sensoy (2010) and Almeida et al. (2012) for the US, and Vermoesen, Deloof, and Laveren (2013) for Belgium show that firms with higher amounts of short‐term debt outstanding before the crisis experienced larger declines in investment during the crisis.

On the other hand, shorter maturities could help mitigate the underinvestment problem of debt finance in times of rising uncertainty and become more attractive to borrowers, because the value of short‐term debt is less sensitive to future investment opportunities than the value of long‐term debt (Myers, 1977).

> 1 Diamond and He (2014) show instead that borrowers should aim at lengthening debt maturity during period of financial crisis, because the rollover‐costs of short‐term debt increase.

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Theory also suggests that the extent to which a crisis impacts firms’ capital structures through higher risk, higher uncertainty, or lower returns is likely to depend on the characteristics of financial systems and on the institutional environment in which firms operate. For example, in the agency cost model of Jensen and Meckling (1976), an increase in the variance of returns would induce more risk‐taking by shareholders (a risk‐shifting effect) in countries where monitoring costs and bankruptcy costs are high. When widespread bad news and uncertainty materialize, shortening of debt maturities and resulting de‐leveraging are likely to be larger in environments where contracts are difficult to enforce, for instance where bankruptcy laws and procedures are such that liquidation of assets is costly (Diamond, 2004). In the international debt context, the lack of commitment to strong investor rights in countries with weak property rights or weak rule of law can result in inefficiently short debt maturities and excessive roll‐over risks that materialize when uncertainty becomes high (Jeanne, 2009).

Without attempting to disentangle demand and supply factors, we show that, since the global financial crisis, firm leverage, the use of long‐term debt to finance assets, and debt maturity have all declined among firms that used long‐term debt financing before the crisis. These patterns are observed in developed countries and in developing countries; they are also present in countries that did not experience a systemic banking crisis, and across different type of firms. The reduction in debt maturity since the crisis is statistically and economically significant, even after we control for observed firm characteristics that are known to affect capital structures and for unobserved time invariant firm specific factors. We also uncover significant heterogeneity across firms and countries. In particular, we find that, after accounting for firm characteristics and firm fixed effects (also encompassing country time invariant characteristics), the decline in 5
leverage and in long‐term debt financing was particularly pronounced among privately held firms, including small and medium firms. In contrast, there is weaker evidence of a significant decline in debt ratios or in the maturity of debt among firms listed on a stock exchange, which are typically much larger than other firms and have significantly easier access to capital market financing. For these firms, instead, these leverage and debt maturity ratios appear to have increased at the onset of the crisis in some cases.

Our analysis also suggests that there are complex interplays between the evolution of firm capital structures and country characteristics during and in the immediate aftermath of the global financial crisis. The impact of country characteristics on capital structures during the crisis cannot be simply uncovered from average econometric associations because they differ markedly by firm size and by type of incorporation (e.g., privately held or publicly listed on a stock exchange). When focusing on privately owned firms where we see significant changes in capital structure, we find that the declines in leverage, debt maturity, and use of long‐term debt were significantly larger for SMEs in the countries with less efficient bankruptcy procedures, with less coverage, scope and accessibility of credit information sharing mechanisms (i.e., credit registries and credit bureaus), with less developed banking systems or with more stringent restrictions on bank entry.

Our findings are consistent with the literature that emphasizes the influence of a developed financial system and of the institutional environment on firms’ capital structures (Caprio and Demirguc‐Kunt, 1998; World Bank, 2015). Specifically, our findings suggest that having a deep banking system and a strong institutional environment help mitigate the adverse effects of financial and economic volatility, albeit in different ways for SMEs and for publicly listed 6
firms. Our paper is also related to studies that have explored the role of country characteristics in explaining the evolution of corporate financing during a financial crisis. For example, Bae and Goyal (2009) examine loan terms offered to firms at the time of the Asian crisis, and find that banks reduced loan maturities and raised loan spreads in countries with weak creditor rights and weak property rights.

Our finding that the decline of leverage and of long‐term debt financing was particularly pronounced among privately held firms and was less significant among publicly listed firms is consistent with the view that stock markets may play the role of a “spare tire” for large firms or for publicly listed firms, by providing an alternative source of external finance and better information when the functioning of the banking system is impaired during the crisis, as suggested by Levine, Lin and Xie (2015). Relatedly, Oh and Rhee (2002) show that the development of a local bond market helped finance the activities of large corporations during the Asian crisis in the Republic of Korea. In another paper, Ayyagari, Demirguc‐Kunt and Maksimovic (2011) study the role of financial markets for the recovery of large firms in a sample of financial crises. During episodes of so called credit‐less recoveries, they show that cash flows rarely recover without a recovery in external credit, and that long‐term debt and equity financing play an important role in this recovery. Our findings suggest that for privately‐held firms, the crisis led to a significant decline in their leverage and in the maturity structure of their debt, and that, in this respect, having a bond market in place did not help SMEs. However, our findings do point to the fact that having a strong financial infrastructure, such as related to credit information sharing, insolvency regimes and the protection of investors, helped mitigate the impact of the 7
global financial crisis on capital structures at both ends, for large, publicly listed firms, and for SMEs as well.

The rest of the paper is organized as follows. Section II describes the data and presents some summary statistics. Section III introduces the empirical approach. Section IV discusses the empirical findings. Section V concludes.

# II. Data and Summary Statistics

Our firm‐level database covers the period 2004‐2011 and comes from Orbis, a worldwide database compiled by Bureau Van Dijk from various national sources.<sup>2,3</sup> Given our focus on the evolution of firms’ capital structures since the global financial crisis, we restrict our main analysis to firms that have at least 6 consecutive years of observations, including 2011. This leaves us with a sample of 277,000 firms established in 79 countries, including 39 high income countries, 25 upper middle income countries, and 15 lower middle and low income countries.

The database is predominantly composed of privately held firms and of SMEs. In the database, 98.7 percent of firms are privately owned and about 1.3 percent of the firms (5,000 firms) are publicly listed on a stock exchange. About 85 percent of firms with employment data

> 2 http://www.bvdinfo.com/en‐gb/our‐products/company‐information/international‐products/orbis

> 3 All firm level variables are winzorised at the bottom 5 percentile and the top 95 percentile. However, in our sample, more than 5 percent of firm observations have zero total debt or zero long‐term debt, so the winsorization has no effect on the bottom percentiles of the distribution.

8
are SMEs (see appendix tables A1).<sup>4,5</sup> At the onset of the global financial crisis in 2007, privately held firms, accounted for 30 percent of total assets and almost 40 percent of total employment in our sample. Moreover, about 60 percent of the firms, or about 160,000 firms, used long‐term debt at some point in the years preceding the financial crisis. Because we are interested in examining the evolution of debt use by firms over time, this subset of firms will constitute our main sample.

Our three main variables of interest are the ratio of total debt to total assets (TDTA), the ratio of long‐term debt to total asset (LTDTA), and the ratio of long‐term debt to total debt (LTDTD). The first two variables capture the extent to which firms finance their assets with debt and long‐term debt, respectively. The last variable captures the maturity composition of debt. A standard approach in the literature is to focus on a narrow definition of total financial debt, defined as the sum of short‐term financial debt (including trade credit),<sup>6</sup> plus long‐term financial debt (defined as the portion of long‐term debt maturing after one year). This approach has often been used in the literature, for instance by Rajan and Zingales (1995), because it is consistent with the focus on external finance in the theoretical corporate finance literature.<sup>7</sup>

> 4 We follow the World Bank Group Enterprise Survey definition, according to which a firm is defined as a small firm if it has between 5 and 19 employees, a medium firm if it has between 20 and 99 employees, and a large firm if it has more than 100 employees. In robustness tests, we will use a threshold of 250 employees to define a firm as an SME, consistent with the EU SME employment threshold.

> 5 The literature has shown that SMEs cover more than 50 percent of the formal workforce in developing countries and a very large share of economic activity on average (Ayyagari, Beck and Demirgüç‐Kunt (2007), Ayyagari, Demirguc‐Kunt, Maksimovic (2011)).

> 6 In our data, short term financial debt includes the portion of long‐term financial debt maturing within the year in addition to the debt with a maturity below one year.

> 7 See also Fan, Titman and Twite (2010). An alternative approach that we do not follow in this paper is to look at the total liabilities of the firm (excluding net worth), and to assess its maturity composition, by differentiating long‐term and short‐term liabilities. We do not follow this approach because liabilities other than net worth and financial debt typically include other items in addition to external debt financing, such as account payables (which are related to how firms manage transactions), pension liabilities, tax items or provisions. They may be unrelated to how firms are

9
In our complete sample, including firms without any long‐term debt prior to the crisis, the average ratios of total debt to total assets, long‐term debt to total assets, and long‐term debt to total debt are 0.34, 0.09, and 0.24, respectively (Table 1, panel A). But there is considerable variation in these ratios, since the standard deviations of these variables are 0.26, 0.14, and 0.31, respectively. Moreover, many firms do not have any debt in a given year: at the end of a given fiscal year, about 9 percent of firms do not have any financial debt, and about 46 percent do not have any long‐term debt.

Firms tend to have lower leverage and shorter debt maturities in developing countries. The average debt to asset ratios are 0.35, 0.35, and 0.22 in high income countries, in upper middle income countries, and in lower middle and low income countries, respectively. Turning to the ratio of long‐term debt to total assets, the average among all firms is 0.10 in high income countries, 0.08 in upper middle income countries, and only 0.02 in lower middle and low income countries, respectively. The average long‐term debt to total debt ratios are 0.26, 0.21 and 0.07 in high income countries, in upper middle income countries, and in lower middle and low income countries, respectively.

In most of our analysis, we will focus on the firms that used long‐term debt financing at least one year before the global financial crisis. Indeed, firms that did not have any long‐term debt on their balance sheet during 2004‐2007 were likely to be already constrained in their access

> externally financed, and are also very dependent on accounting rules or other practices or laws that differ across countries.

10
to external finance, or may not have needed any long‐term financing, and thus were less likely to be adversely affected by changes in market conditions for long‐term financing.<sup>8</sup> Table 1, panel B shows that, among firms that used long‐term debt before the crisis, the average long‐term debt to total assets and the long‐term debt to total debt ratio remain larger in high income countries than in developing countries, but the differences across income groups are smaller. This may be because firms that did not use any long‐term debt financing before the crisis account for a larger subset of the sample in developing countries than in high income countries. Considering only the firms using long‐term debt before the crisis, we find that the average long‐term debt to total assets ratios are 0.15, 0.12, and 0.10 in high income countries, in upper middle income countries, and in lower middle and low income countries, respectively. At the same time, the average ratios of long‐term debt to total debt are 0.36, in high income countries, 0.29 in upper middle income countries, and 0.30, in lower middle and low income countries.

Our database allows us to construct standard firm‐level determinants of capital structures that have been well established in the literature (see Rajan and Zingales, 1995; Booth et al., 2001; Demirguc‐Kunt and Maksimovic, 1996, 1999). These variables aim to capture various factors underpinning firms’ capital structures that are related to agency models of conflicts between insiders and outside financiers as in Jensen and Meckling (1976), Jensen (1986), Rajan (1992), Hart and Moore (1995), Diamond (2004) and asymmetric information models of external

> 8 We will present robustness tests relaxing this condition that a firm used long‐term debt before the crisis.

11
financing as in Myers and Majluf (1984).<sup>9</sup> These standard firm‐level determinants of capital structure include firm size, asset tangibility, growth opportunities, and profitability.

Firm size is expected to have a positive impact on firm’s capital structures since larger firms tend to have higher survival rates than smaller firms, are generally less risky and more diversified, and hence less likely to default on their debt obligations.<sup>10</sup> Moreover, these firms are more transparent than smaller firms, because they are more likely to have adequate financial records to document their performance, and therefore should have easier access to credit. Last, various fixed costs of financial transactions or of contract enforcement often make lending to small firms more costly.

The existing empirical evidence supports the view that firms strive to match the maturity of their assets and of their liabilities (Rajan and Zingales, 1995; Booth et al, 2001). This evidence is supported by theory that suggests that the optimal payment structure for debt should match the timing of project returns (Hart and Moore 1995). Indeed, working capital and other short term investments are better financed with short‐term debt, while firms with a higher proportion of tangible fixed assets in their total assets (FA/TA) require a higher proportion of long‐term funding. Moreover, firms with a larger share of tangible assets that can be pledged as collateral to outside financiers to secure their claims can more easily raise longer‐term debt, because the cost of defaulting on debt obligations are higher. Overall, the use of long‐term debt allows firms

> 9 See Harris and Raviv (1991) for an early review of the literature.

> 10 For OECD cross‐country evidence on firm survival rates and the relationship with size, see Bartelsman, Scarpetta, Schivardi (2003).

12
with a large share of fixed assets to minimize the risk of having to refinance in bad times when lenders may become reluctant to do so (Diamond 1991, 1993).

Firms with good growth opportunities, as proxied by the turnover or sales to total asset ratio (Sales/TA),<sup>11</sup> are more likely to forego profitable investment opportunities if they are more indebted and rely more on longer maturity debt. This is due to the fact that the benefits from new investments financed with risky debt accrue largely to existing debt holders rather than shareholders (Myers, 1977). Hence, we expect a negative correlation between the sales to total asset ratio and the use of long‐term debt. Another explanation for a negative correlation between the turnover ratio and the use of long‐term debt financing is that firms with high sales to assets in sectors such as services may have a greater need for working capital, which is best financed by short term financing.

More profitable firms may be able to grow from retained earnings and would require less external finance than other firms, according to the pecking order view (Myers and Majluf, 1984; Demirguc‐Kunt and Maksimovic, 1999). On the other hand, profitable firms may have easier access to long‐term finance because of their higher cash flows, and because the market for corporate control may force firms to commit to paying out cash by levering up (Jensen, 1986). They may also signal their higher quality by resorting to a higher proportion of short‐term finance, which is relatively less costly, as its rollover risks are mitigated by the arrival of good news on the profitability of its assets (Diamond, 1991). Highly profitable firms may also require less discipline from short‐term debt, especially if their profitability is positively related with the quality of their

> 11 Profit opportunities are often proxied by the ratio of the market value of assets to book value (e.g, Rajan and Zingalez, 1995) something we cannot do here because our sample includes a large sample of non‐listed firms.

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corporate governance (Berglof and Von Thadden, 1994). Profitability is measured by the ratio of profits before taxes and interest expenses to total assets (ROA).

Table 1 panel A and panel B present descriptive statistics on these firm characteristics. On average, among firms that used long‐term debt before the global financial crisis, 38 percent of firms’ assets are fixed assets, with a wide variation between the minimum which is close to zero, and the sample maximum at 84 percent. Average return on assets (ROA) is 6 percent, with a median of 4 percent, and varies between ‐7 percent and 38 percent. The average sales’ turnover ratio is 150 percent and exhibits a large standard deviation of about 100 percent. The average total assets is 10 million USD.

# III. Empirical Specifications

Characterizing the evolution of firms’ capital structures To assess the evolution of firms’ capital structures since the global financial crisis, we estimate a simple empirical model linking a firm’s capital structure to its observable characteristics, to a set of time invariant unobserved characteristics, and to time dummies to capture the impact of the global financial crisis period and its aftermath: _Yijt_     _Firm_ Controlsijt_   0  _Crisis_ 0809 _t_   1  _Post_ Crisis_ 1011 _t_  _f i_   _ijt_ (1) Where _Yijt_ is the total debt to assets ratio, the long‐term debt to total assets ratio, or the long‐term debt to total debt ratio for firm _i_ in country _j_ and during year _t_ . _Firm_controlsijt_ is the set of firm level control variables discussed in the previous section (i.e., the ratio of fixed assets to total assets, return over assets, the sales to assets ratio, and the total assets). _Crisis0809_ 14
is a dummy indicator variable for the global financial crisis of 2008‐09, and _Post_Crisis1011_ is a dummy indicator for the years 2010 and 2011.<sup>12</sup> Our coefficients of interest are μ0 and μ1 since these capture the behavior of firms’ capital structure during the global crisis and subsequently.<sup>_f_</sup> _i_<sup>is a set of firm fixed effects and</sup>  _ijt_ is the firm level residual that is assumed to be potentially auto‐correlated of order one and correlated in the cross‐section at the country level as well.<sup>13</sup> Indeed, the firm capital structures are quite persistent over time. In our complete sample, the correlation of the ratio of total debt to total assets, long‐term debt to total assets, and long‐term debt to total debt with their own lags are respectively 0.82, 0.84, and 0.85. Because of this persistence, standard OLS or fixed effects estimators will be biased. To correct the resulting bias, we use a feasible generalized least square estimator where the error terms are assumed to be serially correlated (Prais‐Winsten estimator). Specifically, the error terms are assumed to follow a first‐order autoregressive process  _ijt_   _ijt_  _ijt_ where  _ijt_ is the error term and  is the autocorrelation coefficient. The equation (1) is transformed by using the autocorrelation coefficient from the Durbin‐Waston statistics. We also cluster observations of the transformed model at the country‐year level. This

> 12 This period also coincides with the crisis in the euro area, which started with the first bailout of Greece in May 2010.

> 13 Various papers in the recent cross‐country comparative literature on corporate capital structures have relied on firm specific data, including Booth et al (2001), Fan et al. (2010), Beck et al. (2008), or on individual loan data, including Bae and Goyal (2009) and Qian and Strahan (2007).

15
allows us to estimate standard errors that correct for common shocks within countries, such as macroeconomic or financial shocks that affect all firms at the country level.<sup>1415</sup> In our estimations, we distinguish between different sets of firms: publicly listed firms, privately held firms, and small and medium‐sized firms, in contrast to the existing literature that has usually focused only on publicly listed firms (see for recent studies Anginer, Demirgüç‐Kunt, Maksimovic, and Tepe, 2015; Levine, Lin and Xie, 2015). Publicly listed firms are in fact only a small subset (about 1 percent) of the total number of firms in our sample. These firms differ from other firms in that they are more transparent, more established, more scrutinized by market analysts, and, other things equal, tend to have easier access to debt and equity financing relative to other firms.

We estimate variations of the empirical model (1) to (a) assess whether the crisis impacted small and medium size enterprises (identified by the dummy variable SME) differently than large, privately held firms when we exclude publicly listed firms from the sample (model 2a)<sup>16</sup> and (b) to analyze the impact of the crisis on large publicly versus large privately held firms when we exclude SMEs from the sample (model 2b).

> 14 Because we use firm level observations and include firm fixed effects, we are able to filter out the influence on the capital structures of time invariant or slow moving firm level characteristics, but also of country characteristics or sector characteristics. Hence, we characterize the within firm evolution since the global financial crisis of the residual portion of the capital structure that is not explained by firm observable characteristics ( _Firm controls_ ) or by slowing moving unobserved firm characteristics ( _fi_ ).

> 15 The wide variation of capital structures over time within firms has been recently documented by DeAngelo and Roll (2015) who study corporate capital structures in the US since 1950 and show that, even if the cross‐sectional variation of capital structures is larger than the within firm variation, firms do experience very significant changes of capital structures over time.

> 16 In our sample, all SMEs are privately held firms.

16
_Yijt_     _Firm_ Controls ijt_   0  _Crisis_ 0809 _t_   1  _Post_ Crisis_ 1011 _t_ (2a)   0  _SME i_  _Crisis_ 0809 _t_   1  _SME i_  _Post_ Crisis_ 1011 _t_  _f i_   _ijt_ In the specification (2a), the average impact of the crisis and the post‐crisis periods on large privately held firms is captured by  0<sup>and</sup>  1 , respectively , while the average impact on SMEs firms is given by  0   0 and  1   1 . Last,  0 and  1 measure the differential impact on SMEs relative to large privately held firms of the crisis period and the post‐crisis period, respectively. In the specification (2b), the average impact of the crisis and the post‐crisis on firms publicly listed on a stock market is given respectively by  0<sup>and</sup>  1 , while the average impact on large privately held firms is given by  0   0 and  1   1 .  0 and  1 measure the differential impact on large privately held firms relative to publicly listed firms of the crisis and post‐crisis periods, respectively.

Country determinants of the impact of the crisis on capital structures of privately‐held firms and SMEs In this part of the paper, we further evaluate the impact of country characteristics on the evolution of firm’s capital structures since the global financial crisis and to assess how they affect unlisted firms and among them, SMEs, building on specification (2a) in the following way.<sup>17</sup> First,

> 17 For brevity we focus this part of the analysis on unlisted firms and SMEs, which experienced the most significant changes in their capital structure.  Sample of large, listed firms are also distributed in a more unbalanced way across the countries in the sample, leading to reduced sample size.

17
we evaluate how country characteristics impacted the capital structures of privately held firms (hence dropping publicly listed firms from the sample) by estimating equation (3).

Where and  1 are the coefficient estimates of the impact of a country characteristic _Ctyi_ on a large privately held firm’s capital structure respectively during the crisis period and during the post‐crisis period. The _differential_ effect of the country characteristic on an SME during the crisis period and<sup></sup> 0<sup>during the post‐crisis period is given respectively by</sup>  0 and 1 , while the _total_ effect on an SME is given by  0   0 and  1   1 .

The literature has identified the country characteristics most likely to have first order effects on firms’ capital structures (Caprio and Demirguc‐Kunt, 1998; Demirgüç‐Kunt and Maksimovic, 1996, 1999; Bae and Goyal, 2009; Fan, Titman, and Twite, 2012; Gopalan, Mukherjee, and Singh, 2014; Demirgüç‐Kunt, Martinez Peria, and Tressel, 2015; among others). In particular, institutional factors, such as the contracting environment, including the extent to which investors are protected (such as through the strength and impartiality of the legal system) and the costs of enforcing contracts and recovering assets during bankruptcy have been found to be important determinants of firms’ capital structure and, in particular, of the share of long‐ term debt. Some studies have also found that lending conditions are less impacted in countries with better contracting environments (Bae and Goyal, 2009). Levine, Lin and Xie (2015) provide evidence suggesting that stronger shareholder protection laws provide the legal infrastructure 18
for stock markets to act as alternative sources of finance when banking systems are in crisis. As discussed in the introduction, several of these characteristics could become even more relevant during a financial crisis when instability and uncertainty are heightened. To identify countries that experienced a systemic banking crisis since the onset of the global financial crisis, we use the indicators constructed by Laeven and Valencia (2010). Other country characteristics are measured as of 2008.

We consider real GDP per capita as an indicator of overall economic and institutional development. As indicator of the efficiency of the legal system in enforcing contracts and addressing insolvencies, we consider two indicators from the World Bank Doing Business Database: an indicator that estimates the average duration of bankruptcy proceedings, and an indicator that estimates the average recovery rate on assets during a bankruptcy. As indicators of investor protection, we consider the index of anti‐director rights and the index of disclosure, taken again from the World Bank Doing Business Database. Last, better transparency and information sharing among lenders may also help support firms’ access to external finance in general and in particular during a financial crisis. To measure this we consider the Doing Business index of depth of credit information.

Financial development has been found to exert a significant impact on the capital structure and debt maturity of firms (Demirguc‐Kunt and Maksimovic, 1996, 1999) and on their performance (Demirguc‐Kunt and Maksimovic, 1998), and tends to disproportionately benefit the use of external finance by smaller firms (Beck, Demirguc‐Kunt, Laeven and Levine, 2005). As indicators of financial development, we consider the ratio of private credit to GDP, the ratio of stock market capitalization to GDP and the private (domestic and international) bond market 19
capitalization to GDP, all from the World Bank Global Financial Development Database. During episodes of banking crisis in emerging markets, the issuance of corporate bonds and the stock market infrastructure may play the role of a “spare tire” by providing an alternative source of long‐term debt finance for large firms (Oh and Rhee, 2002; Chan et al., 2012). By contrast, Levine, Lin and Xie (2015) argue that a good financial infrastructure, in the form of adequate investor protection, rather than a large bond or stock market, helps support firm performance during a financial crisis.

Banking system policies – such as those related to bank competition and contestability– are expected to impact the terms and availability of bank loans, including the maturity of these loans (see Love and Martinez Peria, 2015). This would be in line with the notion that the entry of new financiers could reduce the rents that incumbent banks extract by rolling‐over short‐term loans (Rajan, 1992). Contestability of the banking system could matter even more during a crisis as it may affect firms’ ability to be less dependent on a pre‐determined set of banking relationships and access loans from diverse lenders. To account for this effect in our estimations, we include a variable that captures the regulatory requirements for bank entry. This variable comes from Barth, Caprio and Levine (2013) and higher numbers reflect tighter regulations for bank entry.

Appendix table A2 lists the definitions and data sources for the variables used in our empirical analysis.

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IV. Results

# **Average effect of the global financial crisis**

Figures 1a and 1b illustrate the evolution of firms’ capital structures at an aggregate level since the onset of the global financial crisis. Figure 1a shows changes in country averages of firm level debt ratios between the pre‐crisis period (04‐07) and the global crisis (08‐09) or post‐crisis (10‐11) periods, by size category of firms (large firms, SMEs). In the top two charts, we keep only the firms with strictly positive total leverage before the crisis, and in the following charts, we keep only the firms with strictly positive long‐term debt before the crisis as in the main econometric analysis.<sup>18</sup> What is apparent from Figure 1a is that, both in advanced economies and in developing countries, there was a significant decline in total firm leverage, and in the ratio of long‐term debt to total assets. The decline was larger for SMEs than for large firms. Looking at the evolution of LTDTD, we find that this ratio declined both in high income countries and in developing countries, and even more so in the second group of countries, as expected. The decline was also more marked for SMEs than for large firms. The decline started in 2008‐09 but continued in 2010‐11, across a broad group of countries. Some of these average declines in leverage or in the use of long‐term debt financing are in fact very large. Most strikingly, these declines of about 2.2 percentage points of the ratio of long‐term debt to total assets between 2004‐2007 relative to 2010‐2011 among SMEs in developing countries are very large, since they represent about 25

> 18 The figure is constructed by first averaging firm capital structures during the relevant period, taking first differences, and averaging the first differences by country. The country numbers are next averaged by income groups.

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percent of the entire sample average of LTDTA and about 50 percent of the developing countries’ sample average.

Figure 1b replicates the same descriptive analysis, but instead splits firms into two groups according to their type of incorporation (e.g. privately held or publicly listed on a stock exchange). We find that firms listed on a stock market seem to have, on average, experienced a much more moderate decline in leverage, in the use of long‐term debt, and in the maturity composition of debt than privately held firms. These differences are particularly noticeable for high income countries. This suggests that the distinction between publicly listed firms and privately held firms may be particularly important, independently of their size. Given these interesting trends in the variables of interest, we now turn to a more rigorous empirical analysis to investigate to what extent these stylized facts are confirmed by the econometric analysis described above.

Table 2 reports regressions of equation (1), estimating the average within firm impact on the capital structures ratios (TDTA, LTDTA, and LTDTD) of the global financial crisis (2008‐09), and of the post‐crisis period (2010‐11), after controlling for firms’ characteristics and unobserved firm fixed effects. We present results for the set of firms that used strictly positive amounts of long‐ term debt at least once before the global financial crisis. The results are organized as follows. We first present estimates for firms in all countries and then by income groups. We also show results for countries that did not experience a systemic banking crisis to show that our results are very widespread across countries.<sup>19</sup> The inclusion of firm fixed effects accounts for all unobserved

> 19 When looking at the group of high income countries (to which most of the countries that have experienced a systemic banking crisis since 2008 belong to), we looked at the countries that did not experience a systemic banking crisis. Looking at this group is useful because it tells us whether the changes we may identify among the crisis countries could be taking place more generally in other high income countries. A few developing countries (Kazakhstan, Nigeria, Russia and Ukraine) also experienced a systemic banking crisis during the period 2004‐2011

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firm‐level time invariant factors that may affect capital structures, which would for instance include initial firm conditions (such as initial performance, initial capital structures), in addition to the firm characteristics described above. These firm fixed effects also absorb the impact of time invariant country characteristics on capital structures. The log of GDP per capita is included as an additional explanatory variable to control for the macroeconomic effect of the evolution over time (e.g., after filtering out firm fixed effects) of output per capita. The table shows three panels, one for each of the three different debt ratios we examine: panel A shows results for the TDTA ratio, panel B presents results for LTDTA, and panel C shows results for LTDTD.

Examining the results in Table 2, we see that the two debt ratios (TDTA, LTDTA) and the maturity ratio (LTDTD) all declined on average during the global financial crisis, and remained significantly below their pre‐crisis level in 2010‐11.<sup>20</sup> These declines happened in high income countries (column (2)), in upper middle income countries (column (4)) and in lower middle and low income countries (column (5)). They also took place in countries that did not experience a systemic banking crisis (columns (6) and (7)). The changes in capital structures relative to the pre‐ crisis period are also very significant economically. In 2010‐11, the decline in the leverage ratio (TDTA) reached 3 percentage points in high income countries (column (2) of panel A) and 7 percentage points on average in developing countries (column (3) of panel A). A large part of the decline was driven by the reduction in the use of long‐term debt (panel B), which was ultimately reflected in the maturity ratio (panel C), e.g. a decline in the average LTDTD of 2.5 percentage

> according to Laeven and Valencia (2012). All other crisis countries are high income countries that experienced a systemic banking crisis in 2008 or afterwards.

> 20 Results for TD/TA are very similar if we restrict the sample to firms with positive total debt before the crisis (results not reported).

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points in high income countries and of 9 percentage points in developing countries in 2010‐11 relative to the pre‐crisis period. Thus, the maturity composition effect was particularly large in developing countries (where the infrastructure of the contracting environment is on average the weakest).

These findings hold after controlling for the deviation of various firms characteristics relative to their sample average. This means that we are controlling for the possibility that capital structures may have changed since the crisis simply because firms experienced changes in profitability, in their ratio of fixed assets to total assets, the sales turnover or size which also impacted their capital structures. The coefficients on the firm level control variables are consistent with the predictions and findings of the existing literature (see for instance, Demirguc‐ Kunt and Maksimovic, 1999; Booth et al., 2001; and Demirguc‐Kunt, Martinez‐Peria and Tressel, 2015, for in‐depth discussions). Within firms, a higher proportion of fixed assets tends to be associated with a higher ratio of long‐term debt to total assets, and a higher proportion of long‐ term debt to total debt. However, the association between the ratio of fixed assets to total assets and the leverage ratio appears to change across income groups. It is positive in high income countries, but it is negative developing countries. Given that the leverage ratio combines the use of short‐term debt and of long‐term debt, the expected association between the FATA ratio and leverage is ambiguous. In high income countries, where firms use more long‐term debt than their counterpart in developing countries, an increase in FATA may be associated with greater use of long‐term debt which increases leverage. In developing countries, an increase in the FATA ratio may be associated with lower leverage, because firms may increase long‐term debt by reducing their overall leverage. We find that firms that become more profitable tend to reduce leverage, 24
and their use of long‐term debt. An increase in firm size tends to be associated with higher leverage and longer debt maturities, while firms that increase sales’ turnover reduce their overall indebtedness and rely on shorter debt maturities, as expected.

Overall, in this section we find that the global financial crisis had a significant impact on firms’ capital structures around the world, across various income groups, after controlling for firm characteristics, including their performance.

# **The impact of the global financial crisis by type of firm**

In this section, we try to uncover the extent to which the global financial crisis had different impacts across different types of firms. Our main focus is on the size of the firm – whether a firm is an SME or not ‐‐ and on the ownership structure of the firms – whether a firm is listed on a stock exchange or is privately held.<sup>21</sup> In particular, we study whether SMEs’ capital structures were more affected than those of large private firms, to test the view that SMEs may be more subject to the adverse effects of a credit crunch than larger firms, because of their dependence on a few selective banking relationships due to their intrinsic opaqueness. Also, we investigate if the impact of the crisis significantly differed for firms listed on a stock exchange and for privately held firms, thus testing the hypothesis that the former subset of firms may have

> 21 In robustness tests, we also examine whether the impact of the global financial crisis on firms differed depending on firms’ initial leverage (as firms initially more indebted may be more likely to reduce their use of long‐term finance and their overall leverage) or by their initial productivity (as a potential decline in the availability) of long‐term finance may have impacted low productivity firms more than others.

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benefited from access to capital market financing as a substitute for bank finance (the “spare tire” hypothesis).

To facilitate the analysis, in Table 3, we drop the firms that are listed on a stock exchange and investigate the impact of the financial crisis on the capital structures of large privately held firms and of SMEs. We find that by 2010‐11 the leverage of firms had declined relative to the pre‐ crisis period in all income groups and also in countries that did not experience a systemic banking crisis. The decline was economically and statistically significant, in the range of 4 percentage points. Moreover, we find that, in middle and low income countries, SMEs’ leverage declined significantly more than the leverage of large firms, by an additional 2 to 4 percentage points (columns 4 and 5 of panel A), depending on the specification. As shown in panel B, the use of long‐term debt also declined significantly in all income groups, and in 2010‐11, the ratio was lower by 1.5 percentage points in high income countries and 3.5 percentage points in upper middle income countries, relative to their pre‐crisis average. This decline was even larger for SMEs in lower middle and low income countries. Turning to the maturity structure (panel C) of firms’ debt, we find that the ratio of LTDTD declined on average in all income groups, and that the decline was larger in developing countries than in high income countries. SMEs seemed to experience an additional reduction of debt maturity in lower middle and low income countries.

Table 4 shows the estimations focusing on the sample of large firms (e.g. dropping SMEs), where we differentiate non‐listed firms from firms that are listed on a stock market. We find that the leverage of listed firms did not decline during the global financial crisis, but declined in high income countries in 2010‐11 relative to the pre‐crisis period. The leverage of privately held firms declined significantly more relative to that for listed firms both during the global crisis and in 26
2010‐11 in high income countries and in upper middle income countries. This relative decline of leverage for large privately held firms was economically significant: 2 percentage points in high income countries, and 4 percentage points in upper middle income countries. Turning to the ratio of long‐term debt to total assets, we found that a decline occurred for listed firms in high income countries and in lower middle and low income countries after the crisis relative to the pre‐crisis average. The decline was again significantly larger for non‐listed firms in high income countries and in upper middle income countries. Finally, the debt maturity of listed firms in developing countries was lower in 2010‐11 than their pre‐crisis average. It was lower for non‐listed firms in high income countries and in upper‐middle income countries.

Table 5 and 6 report robustness tests for the results of Table 3 and 4. In Table 5, we report robustness tests for Table 3, first changing the threshold defining SMEs from 100 employees to 250 employees; and second keeping in the sample the firms that disappeared in 2011. In table 6, we report robustness tests for table 4. First, we add an interaction of the crisis and post‐crisis dummy with the average total asset of each firm.<sup>22</sup> By doing so, we are able to assess the relevance of being listed on a stock market or not while controlling for the impact of the crisis by firm size. Second, we keep in the sample the firms that do not have data for 2011. We find that our main findings do not change significantly.<sup>23</sup> Tables 7 and 8 present additional robustness tests – e.g. whether our findings related to the incorporation of the firm (listed or not‐listed) and to the size of the firm may in fact be related

> 22 This additional interaction term is not reported to simplify the exposition of the key results in the table.

> 23 We also find positive coefficients on the interaction term between the crisis or post‐crisis dummy and the average firm size. This confirms our finding that size was also a determinant of the impact of the crisis.

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to other features of the firms that may have been relevant in time of crisis. In Table 7, we examine the interaction of the crisis dummies with an indicator for the initial (2007) leverage of firms. Specifically, we created a dummy variable equal to one whenever a firm’s leverage in 2007 was above the median of firms’ leverage in the country group considered. There is indeed a view that some firms may have experienced debt overhang as a result of the crisis (Kalemli‐Ozcan, Laeven and Moreno, 2015). This view suggests that firms that were more indebted would have been more likely to reduce their indebtedness. The results in Table 7 show that our main conclusions are not altered when we control for the impact of initial leverage. But we also find support for the view that some of the deleveraging may be the consequence of a debt overhang in the balance sheet of some firms. Surprisingly, we find that firms that were initially more indebted experienced a smaller reduction in debt maturity (LTDTD) relative to the pre‐crisis average than other firms.

In Table 8, we explore whether firms with initially lower productivity may have been more impacted and experienced greater deleveraging than others by the crisis. Indeed, there is evidence that economic crises, including financial crises, can “cleanse out” entrenched inefficiencies by reallocating resources and cutting access to finance of less efficient firms, which will eventually contribute to overall productivity growth (Caballero and Hammour, 1994). An implication of this view is that the supply of credit, and especially of long‐term credit, should have declined relatively more for firms that were initially less productive. When splitting each subsample of firms by the median labor productivity in addition to the size or incorporation dimension, we find that our results are robust and that there is little evidence supporting the “cleansing hypothesis”.

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# **Country determinants of the evolution of capital structures**

Table 9 summarizes the estimations of equation (3) where we assess the extent to which SMEs’ and non‐listed firms’ capital structure react differently to the crisis depending on various country characteristics. In Panel A, we find that the difference in deleveraging between large firms and SMEs was more positive in countries with higher incomes (column 2), deeper banking systems (column 3), with better investor protection (column 7), with faster insolvency proceedings (column 9), with better credit information (column 10) and in countries with less country risk (column 11), suggesting that in countries with such characteristics, SMEs’ access to debt finance was less adversely affected relative to that of large firms.

In Panel B, we show that the decline in the ratio of LTDTA was more muted for SMEs in countries with higher incomes, more efficient bankruptcy procedures, deeper banking systems, stronger protection of investor rights, higher quality credit information mechanisms, and greater contestability of the banking system. An SME located in a country with better characteristics along one of these dimension would experience a significantly smaller reduction in its use of long‐ term debt relative to a large firm than an otherwise similar SME located in another country. We do not find that the evolution of the capital structures of firms located in the countries that experienced a systemic banking crisis differed from the evolution of capital structures in other countries.

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Panel C in Table 9 reports the regressions with LTDTD as the dependent variable. We find that LTDTD declines more among SMEs in countries with less contestable banking systems, less efficient bankruptcy regimes and, surprisingly, deeper bond markets.<sup>24</sup> The estimated effects reported in Table 9a, b, and c are economically significant. For example, considering the estimates of the differential effect of country characteristics on SMEs’ capital structure, the coefficients imply that a one standard deviation increase in the private credit to GDP ratio, the log of real GDP per capita, the time to resolve insolvencies, and the depth of credit information would be associated with a change in the leverage ratio TDTA of SMEs relative to large firms of respectively 1.6 percentage points, 1.7 percentage points, ‐1.2 percentage points, 1.5 percentage points, and 1.0 percentage points. The same exercise for the private credit to GDP ratio, the index of entry requirements, the time to resolve insolvencies, and the depth of credit information index would be associated with a change in the long‐term debt to asset ratio LTDTA of respectively 0.7 percentage points, ‐0.7 percentage points, ‐0.8 percentage points, and 0.7 percentage points. Last a one standard increase in the size of the private bond markets, in the time to resolve insolvencies would be associated with a change in the debt maturity LTDTD of SMEs relative to that of large firms respectively by ‐2.2 percentage points and ‐3.4 percentage points.

These findings are broadly robust to various specification changes (appendix table A3), such as: (1) removing the restriction that firms should have strictly positive LTD at least one year before the crisis; (2) including in the sample the firms that disappeared in 2011; (3) using a 250

> 24 This may suggest that in countries with deeper private bond markets, banks specialize in lending at shorter maturities, as suggested by Diamond (1991), and that this maturity effect is reinforced during a financial crisis.

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employee threshold to define SMEs instead of a 100 employee threshold; (4) controlling for the interaction of the crisis and post‐crisis dummy with log of real GDP per capita.

In Table 10, we report regressions in which country characteristics that have significant coefficients are considered simultaneously in the estimation. Many of these country characteristics are quite correlated with each other, so significance of the estimated coefficients should be expected to drop. Nonetheless, the point estimates are generally stable and some of these variables remain consistently significant. The results show that indicators of the financial infrastructure (credit information, efficiency of the bankruptcy process) and the indicator of contestability of the banking system yield significant coefficients, in particular in the interaction term with the SME dummy.

# V. Conclusion

This paper establishes new stylized facts on the evolution of corporate financing structures during the global financial crisis of 2008‐09 and its aftermath of 2010‐11. We find evidence of a widespread deleveraging of firms in developing countries and in high income countries. This deleveraging was associated with a reduction in the use of long‐term debt finance, both in high income and in developing countries, including in countries that did not experience a banking crisis. These changes were particularly significant for firms that did not have access to capital market financing, while the changes were more moderate for publicly listed firms.

We also find robust evidence that the extent of deleveraging and the reduction in debt maturity of privately held firms, in particular SMEs, was larger in countries with shallower banking systems, with weaker legal systems for bankruptcy, weaker investor protection, lower quality of 31
credit information, and with more restrictions on bank entry. In contrast, there is weaker evidence of a significant decline of leverage and debt maturity among firms listed on a stock exchange, which are typically much larger than other firms and likely benefit from the “spare tire” of easier access to capital market financing. Overall, the evidence suggests that policies affecting financial infrastructures, perhaps more than direct exposure to the crisis environment, had significant effects on firms’ capital structures. The evidence also supports the view that capital markets may provide a “spare tire” in time of financial crisis for large, publicly listed firms.

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