Determinants of corporate debt securities in the Euro area

Abstract

This study examines the macroeconomic determinants of corporate debt securities in the euro area. The financing costs, as approximated by the cost of debt securities vis-à-vis other sources of corporate finance, and financing needs, as captured by mergers and acquisitions and gross domestic product, are found to be significant determinants in the short and long run. The empirical results are also supportive of substitution between debt security and internal financing unrelated to cost of differentials in the short run and of differences in the determination of long- and short-term debt securities. These findings are robust across different samples and specifications.

Keywords:

• Corporate finance
• debt securities
• euro area

Notes

1. For a more elaborate description of these studies see, among others, de Haan (1997) and Lipson (2003).

2. For instance, see de Bondt et al. (1997) for an application to several euro area countries of private sector's demand for financial assets, including M3, private sector holdings of government bonds, other domestic capital market investments and foreign assets.

3. There are, however, studies that model both the demand for and supply of bank lending (Kakes, 2000).

4. As regards substitution between long- and short-term debt securities through relative prices, the spread between long- and short-term interest rates is considered. This effect is, however, found to be insignificant and therefore not presented. An explanation for this is that the term spread relates on the one hand negatively to long-term debt securities relative to short term, on the other hand positively. A steep yield curve implies higher financing costs for long-term debt securities compared with short-term issuance, but at the same time, higher expected short-term interest rates, at least according to the expectation theory of interest rates, which makes long-term debt securities more attractive relative to short term.

5. For instance, Choe et al. (1993) examines the relation between equity issuance and the business cycle. They find that the proportion of external financing accounted for by equity, relative to debt, is substantially higher in expansionary phases of the business cycle. The same may hold for debt securities relative to bank loans and internal financing.

6. Given the construction of retained earnings, as shown in the Appendix, one could also argue that retained earnings of firms quoted on stock markets are positively related to equity financing.