Is the use of bank debt as a governance mechanism conditioned by the financial system? The cases of Chile and Spain

Abstract

We test whether the use of bank debt as a governance mechanism is conditioned by the financial system in which firms operate. Our results indicate that the legal and institutional environment determines the use of bank debt to finance growth opportunities. Firms use bank debt to finance their growth opportunities when the country's banking system contributes to solving agency and asymmetric information problems and avoiding information monopoly costs. The evolutionary process of the financial systems in each country means that market imperfections such as information asymmetry or agency costs can have a diverse influence on firms’ bank debt decisions.

Acknowledgements

The authors are grateful for the comments by Pablo de Andrés Alonso, Valentín Azofra Palenzuela, José María Fortuna Lindo, Gabriel de la Fuente Herrero, Félix López Iturriaga, Susana Menéndez Requejo, Juan Antonio Rodríguez Sanz and John Manley. We are also grateful to two anonymous referees as well as to the participants at the Thirteenth ACEDE Congress held in Salamanca, Spain and to the participants at the Fortieth EFA Annual Meeting held in Mystic, Connecticut. All remaining errors are the sole responsibility of the authors.