Market value and corporate debt: the 2006–2010 international evidence

Abstract

We analyse the differences in the financial debt level of firms both in market-oriented systems (the US, the UK) and bank-oriented systems (Germany, France and Italy) on a sample of 3360 listed companies between the period 2006 and 2010. Results indicate that the debt level is significantly higher in market-oriented systems when compared to the book value of equity. We find confirmation that Book-to-Market (BTM) cannot explain the debt level in bank-oriented systems but, contrary to reference literature, we observe that the BTM ratio has a negative influence on the debt level in market-oriented systems, especially in the United States. We claim different reasons to explain the evidence: (i) the financing standards of market-oriented countries, with an inflationary effect of market values on debt; (ii) an underlying activity for ownership protection and (iii) the unfavourable conditions of stock market over the years of the financial crisis that reduced the convenience of equity issuance.

Keywords:

• corporate debt
• book-to-market
• financial crisis
• market-oriented versus bank-oriented financial systems

JEL Classification::

• G10
• G30
• G32

Notes

¹ In this article the term ‘financial debt’ and ‘debt’ are used as synonym, as well as ‘financial leverage’ and ‘leverage’.