FIRMS’ USE OF LONG-TERM FINANCE

문서에서 Long-Term Finance (페이지 61-76)

Determinants and Impact

FIRMS’ USE OF LONG-TERM FINANCE

Why would a fi rm want to use long-term, rather than short-term, fi nance?

Firms tend to match the maturity of their as-sets and liabilities, and thus they often use long-term debt to make long-term invest-ments, such as purchases of fi xed assets or equipment. Theory suggests that the optimal payment structure for debt is one that matches the timing of project returns (Hart and Moore 1995). Empirically, this theory implies that fi rms use long-term debt to purchase fi xed as-sets or equipment, while they use short-term

debt to fi nance working capital such as payroll and inventory. Studies for developed and de-veloping countries fi nd evidence that fi rms do match the maturity of their assets and liabilities (Stohs and Mauer 1996 for the United States;

Schiantarelli and Sembenelli 1997 for Italy and the United Kingdom; Schiantarelli and Srivastava 1997 for India; and Jaramillo and Schiantarelli 2002 for Ecuador). Additionally, in a 1999 survey, chief fi nancial offi cers of U.S. companies reported that matching the maturity of their fi rm’s debt with the life of its assets was the most important factor affect-ing their choice between short- and long-term debt (Graham and Harvey 2001).

Long-term debt also minimizes the risk of having to refi nance in bad times. Chief fi nan-cial offi cers in the United States list this reason as the second-most important one for choos-ing long-term over short-term debt (Graham and Harvey 2001). In the theoretical litera-ture, this problem is called “liquidity risk.”

That is, when debt matures at a time when the fi rm experiences a negative shock to its earn-ings or when credit market conditions dete-riorate, lenders may be reluctant to refi nance (Diamond 1991, 1993). Long-term debt low-ers liquidity risk for fi rms because it does not

if the fi rm expects to receive positive returns in the future (Diamond 1991).

On the other hand, long-term fi nance can distort managers’ incentives, hampering in-vestment and fi rm performance. Economists have uncovered at least two ways through which long-term debt may distort incentives.

First, long-term debt implies that the fi rm shares not only long-term returns but also long-term losses with the lender, so managers or owners may exert less effort to avoid losses (Rajan 1992). Second, short-term debt has a stronger disciplinary role than long-term debt because it needs to be renegotiated frequently, resulting in less wasteful activity by fi rm man-agers or owners (Jensen 1986).

The theoretical literature is thus incon-clusive on how the maturity of debt affects investment and fi rm performance, and em-pirical evidence is needed to shed light on this question. It is, however, challenging to iden-tify whether having long-term fi nance causes changes in investment or fi rm performance be-cause third factors could determine both use of long-term fi nance and investment and fi rm performance. For example, fi rms with better managers may obtain more long-term debt and may grow faster. Also, better-performing fi rms may have an easier time obtaining long-term fi nance, so that performance may lead to use of long-term fi nance instead of the other way around (reverse causality). Many exist-ing studies thus report associations that may not be causal, but the authors typically take great care to control for a range of observable third factors or to minimize the risk of reverse causality.1

Evidence from cross-country analysis shows a positive relationship between longterm fi nance and fi rm performance—unless the fi -nance is provided in the form of directed credit.

Demirgüç-Kunt and Maksimovic (1998) used fi rm-level data for 30 high-income and devel-oping countries to show that fi rms with more long-term liabilities tend to grow faster than they would if they relied solely on internal re-sources. This fi nding is robust to controlling for fi rm characteristics, as well as for a coun-try’s macroeconomic environment, fi nancial development, legal effi ciency, and the extent of have to be refi nanced as frequently. At the

same time, long-term debt shifts risk to lend-ers because they have to bear the fl uctuations in the probability of default and changing conditions in fi nancial markets, such as inter-est rate risk. Often lenders require a premium as part of the compensation for the higher risk this type of fi nancing implies.

Not all fi rms need long-term fi nance.

Whether or not a fi rm needs longterm fi -nance depends on the types of assets being fi nanced and on their desired degree of risk-sharing with lenders. Firms with good growth opportunities—for example, those that expect to experience mostly positive shocks in the fu-ture—may prefer short-term over long-term fi nance. These fi rms may want to refi nance their debt frequently to obtain better loan terms after they have experienced a positive shock (Diamond 1991; Barclay and Smith 1995; Guedes and Opler 1995). In addition, fi rms with high growth opportunities may not want to take on long-term debt because fi rm managers or owners have to share the returns with the lender well into the future and thus may earn less than they could have on their investment (Myers 1977). Empirical evidence from China and the United States shows that fi rms with fewer growth opportunities are more likely to rely on long-term debt (Barclay and Smith 1995; Liu and Xu 2014).

What are the implications of long-term fi nance for fi rm performance?

For fi rms that need it, long-term fi nance is likely to have a positive effect on investment and fi rm performance. Having longterm fi -nance allows fi rms to invest in projects that bring in returns over a relatively long time ho-rizon, such as purchase of fi xed assets. These investments may increase fi rm productivity and profi tability. If only short-term debt is available, fi rms may forgo these types of in-vestments since they prioritize projects that generate returns in the short run (Hart and Moore 1995). In the presence of contract en-forcement problems or asymmetric informa-tion, short-term debt can also lead to exces-sive liquidation of projects by the lender even

Indicators of use of long-term fi nance by fi rms

Information on the use of long-term fi nance by fi rms across a large number of coun-tries comes primarily from balance sheet data collected from Bureau van Dijk in the ORBIS database and also from the World Bank Enterprise Surveys. ORBIS includes comprehensive balance sheet information that makes it possible to calculate fi rms’ long-term liabilities for 87 countries covering the years 2004 to 2011. One caveat of the ORBIS data is that the coverage of fi rms varies widely across countries and the data are not neces-sarily representative of all fi rms in each coun-try. In addition, the sample is skewed toward higher-income countries.3 The World Bank Enterprise Surveys, which are available for 123 countries, are representative at the coun-try level and have greater coverage of lower-income countries.4 The surveys ask fi rms about the sources of fi nancing for any fi xed assets that they purchased over the past year, that is, internal funds or various sources of external funds. Although the survey does not ask about the maturity of the external fi nanc-ing for purchase of fi xed assets, it is likely to be long term since fi rms tend to match the maturity of their assets and liabilities. In a separate question, the Enterprise Surveys ask fi rms about the duration of their most recently received loan or line of credit. This question thus includes explicit information about debt maturity, but it is only available for a subset of 43 countries.5

Firms in developing countries have fewer long-term liabilities than fi rms in high-income countries, even after controlling for fi rm char-acteristics. Figure 2.1 displays balance sheet data from ORBIS showing that the percent-age of fi rms that report having any long-term liabilities is lower in developing than in high-income countries (Demirgüç-Kunt, Martínez Pería, and Tressel 2015a). The difference is particularly prominent for small and medium enterprises (SMEs): in the median developing country, 66 percent of small and 78 percent of medium fi rms report having long-term debt, compared with 80 percent and 92 percent, government intervention. The authors also

examined the role of government subsidies and found that government subsidized or di-rected credit is negatively correlated with fi rm growth.

The within-country evidence on the link between long-term debt and fi rm performance is less clear. Several country studies fi nd a positive relationship between long-term debt and fi rm productivity, but the positive corre-lation between the use of long-term debt and fi rm productivity is reduced or even reversed when the fraction of subsidized credit is high (Schiantarelli and Sembenelli 1997; Schian-tarelli and Srivastava 1997; Jaramillo and Schiantarelli 2002). However, research us-ing data on more than 40,000 fi rms in China showed either no correlation between use of long-term debt and productivity (Li, Yue, and Zhao 2009) or found a negative correla-tion between the two variables (Liu and Xu 2014).2 Similarly, Jiraporn and Tong (2010) found a negative relationship between long-term debt and fi rm value for listed fi rms in the United States. Unfortunately, these existing studies do not exploit exogenous variation in the availability of long-term debt, so they do not necessarily measure the causal effect of long-term debt on fi rm performance.

Within-country case studies fi nd a positive effect of long-term debt on fi rm investment, however. Evidence from Ecuador, Italy, and the United Kingdom shows no robust corre-lation between use of long-term debt and in-vestment (Schiantarelli and Sembenelli 1997;

Jaramillo and Schiantarelli 2002). In contrast, Li, Yue, and Zhao (2009) and Liu and Xu (2014) found that use of long-term debt is positively associated with long-term invest-ment in China. Whether these fi ndings are driven by estimation bias is not clear, how-ever, and the associations may not be causal.

Other papers have used the decline in credit availability during the recent fi nancial crisis to assess the causal effect of long-term credit on fi rm investment (box 2.1). These papers show that the availability of long-term credit has a positive effect on investment in Belgium and the United States in the context of the fi nan-cial crisis.

BOX 2.1 Firms’ Long-Term Finance and Investment after the Global Financial Crisis

Several researchers have used the decline in credit availability during the recent fi nancial crisis to assess the causal effect of long-term credit on fi rm invest-ment. The fi nancial crisis made it diffi cult for fi rms around the globe to get new credit and put a stop to the growth of long-term credit in some coun-tries. For example, Park, Ruiz-Ortega, and Tressel (2015) looked at panel data from countries in the European Union over the past decade to examine how bank credit of different maturities to nonfi nan-cial corporations evolved before and after the global fi nancial crisis. The authors found that during the

precrisis period, long-term credit in the Europe and Central Asia (ECA) region grew substantially more than in other European countries (7.3 percent com-pared with 2.5 percent) and that this difference was larger than that for the growth rates of short-term credit (4.8 percent in ECA countries compared with 2 percent in non-ECA countries). Once the crisis hit, credit growth rates collapsed to near zero in both regions (fi gure B2.1.1).

Duchin, Ozbas, and Sensoy (2010) used data on publicly traded fi rms in the United States to study the effect of the recent financial crisis on

invest-ment. Consistent with the liquidity risk problem of short-term debt, they found that fi rms with higher amounts of net term debt (defi ned as short-term debt minus cash, divided by total assets) out-standing before the crisis saw larger declines in investment after the crisis. Higher amounts of out-standing long-term debt, on the other hand, are not associated with a decline in investment after the crisis.

Almeida and others (2011) followed a similar approach to measure the effect of long-term debt on investment by U.S. fi rms. They compared fi rms whose long-term debt matured at the end of 2008 (that is, with more than 20 percent of long-term debt due within a year after the crisis) to other fi rms whose long-term debt was scheduled to mature

in later years. Results show that firms with high amounts of maturing debt cut their investment rate (defi ned as the ratio of capital expenditures to fi xed assets) by 2.5 percentage points more than otherwise similar fi rms whose debt was scheduled to mature after 2008. This drop in investment is quite large, representing a decline of about one-third of precrisis investment levels.

Vermoesen, Deloof, and Laveren (2013) also compared firms with different long-term debt maturities to estimate the impact of the fi nancial cri-sis on private small and medium-size enterprises in Belgium. They fi nd that those fi rms that at the start of the crisis had a larger part of their long-term debt maturing within the next year experienced a signifi -cantly larger drop in investment in 2009.

2003 2004

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 –20

–30 40 30 20 10 0 Growth rate, %–10

a. Short-term credit

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 50

40 30 20 10 0 –10

Growth rate, %

Non-ECA countries ECA countries

b. Long-term credit FIGURE B2.1.1 Growth Rate of Credit, 2003–14

Source: Park, Ruiz-Ortega, and Tressel 2015.

Note: Short-term credit is defi ned as credit with maturity up to one year. Long-term credit is defi ned as credit with maturity over fi ve years.

respectively, in the median high-income coun-try. Earlier data on the ratio of long-term liabilities to total assets for 30 countries av-eraged over 1980 to 1991 shows a similar pattern, and this fi nding cannot be explained by differences in the maturity of assets across countries (Demirgüç-Kunt and Maksimovic 1999). Fan, Titman, and Twite (2012) also found that high-income economies have higher ratios of long-term debt to total debt after controlling for a number of fi rm char-acteristics in a sample of 39 countries cov-ering the period 1991 to 2006. Enterprise Survey data suggest that fi rms in developing countries use less external fi nance to fi nance fi xed assets than those in high-income coun-tries (fi gure 2.2), and that loan durations are shorter in developing countries than in high-income countries (fi gure 2.3).

Which factors can limit fi rms’ access to long-term fi nance?

Country characteristics and evidence

Macroeconomic and political risks in devel-oping countries often lead to uncertainty, which can raise the cost of long-term fi nance and can make fi rms reluctant to invest in fi xed assets. One reason why fi rms use less long-term debt in developing countries is that it tends to be particularly expensive in these countries.6 The higher price of long-term debt likely refl ects risk aversion of lenders who re-quire high returns to compensate for country risk (Broner, Lorenzoni, and Schmukler 2013). Country risk includes macroeconomic instability, as well as the risk that government will appropriate some of the returns to proj-ect investment through corruption or expro-priation. Empirical evidence suggests that fi rms use less long-term fi nance in countries with high or volatile infl ation, with more gov-ernment corruption, and with weaker prop-erty rights protection (Demirgüç-Kunt and Maksimovic 1999; Beck, Demirgüç-Kunt, and Maksimovic 2008; Fan, Titman, and Twite 2012). Research on the global fi nancial crisis by Demirgüç-Kunt, Martínez Pería, and Tressel (2015b) also illustrates the importance

Developing countries High-income countries

Large firms (100+) Medium firms (20–99)

Small firms (< 20) 100

FIGURE 2.1 Percentage of Firms with Any Long-Term Liabilities by Country Income Group and Firm Size, 2004–11

Source: Calculations for 80 countries, based on ORBIS (database), Bureau van Dijk, Brussels, https://orbis.bvdinfo.com. For a detailed data description, see Demirgüç-Kunt, Martínez Pería, and Tressel 2015a.

Note: Developing countries include low- and middle-income countries. Firm size is defi ned based on the number of employees. The median for each country income group and fi rm size category is calculated as follows. First, the value of long-term liabilities is averaged over 2004–11 for each fi rm. Then, the percentage of fi rms with values above zero is calculated in each country and fi rm size category. Finally, the median percentage across countries in each country income group and fi rm size category is calculated. The fi gure displays median values across countries instead of averages to lessen the importance of outliers.

FIGURE 2.2 Share of Fixed Asset Purchases Financed from External Sources by Country Income Group, 2006–14

Source: Calculations for 123 countries, based on Enterprise Surveys (database), International Finance Corporation and World Bank, Washington, DC, http://www.enterprisesurveys.org.

Note: The average for each country income group is calculated as follows. First, numbers are averaged using sampling weights across fi rms by country and survey year. Second, numbers are averaged across survey years for each country. Finally, numbers are averaged across countries in each income group.

that cannot be self-fi nanced is positively re-lated to the development of both the securities markets and the banking system but in differ-ent ways, especially at lower levels of fi nancial development. While sustainable development of both—when predicted by the underlying contracting environment—improves access to fi nancing, the development of securities mar-kets is more strongly associated with long-term fi nancing, whereas the development of the banking sector is more strongly associated with the availability of short-term fi nancing.

The relationship between stock market devel-opment and improved availability of long-term debt may be due to the improved quality and availability of information that accompa-nies stock market development. Demirgüç-Kunt, Martínez Pería, and Tressel (2015a) up-date and confi rm these fi ndings using a new dataset (box 2.3).

Weakness in the contractual environment is an important underlying reason why long-term debt is less common in developing coun-tries. The disciplinary role of short-term debt is more important in an environment with weaker rule of law (Diamond 2004). When

Weakness in the contractual environment is an important underlying reason why long-term debt is less common in developing coun-tries. The disciplinary role of short-term debt is more important in an environment with weaker rule of law (Diamond 2004). When

문서에서 Long-Term Finance (페이지 61-76)