Financing mix of non-financial corporations: evidence from European countries

Abstract

This study analyses the financing decisions of listed non-financial corporations in France, Germany and the UK over the period 1969 to 2000. These countries represent satisfactorily different financial structures of their classes, Le., Latinic, Germanic and Anglo-Saxon traditions, respectively. Thus, this thesis attempts to shed light on the impact of institutional differences (accounting and taxation systems, bankruptcy laws, corporate governance structure) on corporate financing mix policies. The empirical investigation comprises three main themes; capital structure (debt versus equity), debt maturity structure (short-term versus long-term debt), and debt ownership structure public versus private debt). It is obvious that factors influencing financial strategies of firms change overtime and firms are expected to adjust themselves to their target financing structure according to random events. For these reasons we use dynamic panel data and choose Generalised Methods of Moments (GMM) as an appropriate estimation procedure for our autoregressive-distributed lag model GMM methodology overcomes the problems of endogeneity, heteroscedasticity, normality, simultaneity and measurement errors, which are common for studies using firm-level data. The empirical evidence shows that corporate financing decisions are determined by both firm-specific (profitability, tangibility and maturity of assets, growth, quality, size, liquidity, payout policy, corporate tax rates, and earnings volatility), and market-related factors (term structure of interest rates, market equity premium, interest rate volatility, stock return volatility, stock price performance). However, the strength and nature of the effect of these factors are dependent on the financial environment and tradition of the countries of interest. Therefore, our research argues that financing mix decisions of firms are not only the product of their own characteristics, but also the outcome of environment and traditions in which they operate.