We empirically investigate the impact of government debt on corporate financing decisions in an international setting. We show a negative relation between government debt and corporate leverage using data on 40 countries between 1990–2014. This negative relation is stronger for government debt that is financed domestically, for firms that are larger and more profitable, and in countries with more developed equity markets. To address potential endogeneity concerns, we use an instrumental variable approach based on military spending and a quasi-natural experiment based on the introduction of the Euro currency. Our findings suggest that government debt crowds out corporate debt.

‍

Co-authors:

Irem Demirci, Nova School of Business and Economics

Jennifer Huang, Cheung Kong Graduate School of Business, China

Clemens Sialm, Department of Finance, McCombs School of Business, University of Texas at Austin

‍

This content was originally published in Novafrica.org.‍