Debt sources: Empirical determinants and their impact on corporate financial policies
Different debt sources have different characteristics, which can have different impact on various corporate financial policies. Understanding a firm’s choice of debt sources and how this choice affects the firm’s value and its financial decisions is important for managers, lenders and investors. Using an updated hand-collected data set of debt sources, my thesis investigates the factors driving the debt source mix and its impact on investment and dividend policies.
I examine the empirical determinants of the debt sources based on three different theoretical frameworks. In general, I observe that firm size, firm age and leverage are important factors driving a firm’s choice between public and private debt. Moreover, I attempt to resolve the puzzle found in the literature, in which public and bank debt are similarly related with most firm characteristics, while non-bank private debt exhibits an opposite pattern. Using an updated data set of debt sources, I find that bank debt and public debt behave oppositely, while non-bank private debt stays in the middle with combined features of both bank and public debt choice. This result is consistent with the characteristics of debt sources described in the literature. I further examine the role of the banks’ monitoring on investment efficiency. I find that firms with higher bank debt use have higher investment inefficiency. This impact however, is not present in smaller, loss-making, or high growth firms, suggesting that banks might not monitor all borrowers, but selectively discipline firms with certain level of risks and information asymmetry. Finally, I study the impact of the debt source mix on dividend payouts. In general, I find that firms with more bank debts are the least likely to pay dividends and often pay the smallest amount of dividend, followed by non-bank private debt and public debt, which comes last. Moreover, the impact of debt sources on dividend policies can vary with firm credit risk, information asymmetry and the need for costly contracts.