Does money supply shape corporate capital structure? International evidence from a panel data analysis

ABSTRACT

We investigate how the growth rate of money supply, as a key dimension of the monetary policy, affects corporate debt decisions using a broad sample of companies from developed and emerging economies. Although expansionary measures increase market liquidity and encourage the use of debt, our results show that there is an optimal level of money supply beyond which additional liquidity discourages firms from using debt. However, the intensity of the effect of money growth on debt and the level of liquidity at which firms’ access to debt financing is maximized depends on the characteristics of the banking system. The effect is mitigated in countries where banks hold a higher fraction of liquid assets. By contrast, the relation between money supply and corporate leverage is more pronounced when a higher proportion of banks’ resources are allocated to private credit.

KEYWORDS:

• Monetary policy
• money growth
• capital structure
• bank liquidity
• private credit

JEL CLASSIFICATIONS:

• E44
• E52
• E58
• G20
• G32

Acknowledgements

We would like to thank the Editor, Chris Adcock, the Guest Editors of the Special Issue, Manuel Rocha Armada and Zélia Serrasqueiro, and three anonymous reviewers for valuable feedback that contributed to improve the quality of the paper. We are also thankful to João Carlos Correia Leitão, Ana Paula Matias Gama and Florinda Silva for comments and suggestions on previous versions of this paper. We benefited from the comments of participants at the 2016 IFABS Conference on Risk in Financial Markets and Institutions in Barcelona and the 2016 Finance Conference of the Portuguese Finance Network (PFN) in Covilhã. All errors are our responsibility.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 For a detailed description and a review of the literature on the bank lending channel and the balance sheet channel, see Bernanke and Gertler (1995).

2 Debt inflexibility is defined as the inability to replace bank loans with bonds.

3 As Table 2 (Panel A) highlights, the subsample used to test Hypothesis 2 contains 5,575 listed companies (46,674 firm-year observations) covering the years 2001–2013, while the sub-sample used to test Hypothesis 3 consists of 8,158 listed firms (70,180 firm-year observations) and spans the years 2000–2013.

4 This variable comes from the following WB link: https://data.worldbank.org/indicator/FM.LBL.BMNY.ZG.

5 These two control variables, which capture country-level characteristics, have been obtained from the following two WB links: https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?view=chart and https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG.

6 The two indices come from the following IMF link: http://data.imf.org/?sk=F8032E80-B36C-43B1-AC26-493C5B1CD33B.

7 The information on this variable is obtained from the following WB link: https://data.worldbank.org/indicator/IC.FRM.BKWC.ZS. We should also clarify that this information is not available for some countries. In this case, we consider the world average value to have wider country coverage.

8 These two variables come from: https://data.worldbank.org/indicator/FD.RES.LIQU.AS.ZS?view=chart and https://data.worldbank.org/indicator/FS.AST.DOMS.GD.ZS.

9 To obtain the inflection point of the growth rate of the monetary aggregate, it is necessary to compute the first order derivative of leverage with respect to the monetary aggregate variable using Equation (5) and then equal to zero: that is, $\frac{dLE{V}_{it}}{dMAG{R}_{j,t-1}}={\hat{\beta }}_1+2{\hat{\beta }}_{2}MAG{R}_{j,t-1}=0$, which implies that the optimal level of money supply at which leverage is maximized is: $MAG{R}_{j,t-1}=-{\hat{\beta }}_1/2{\hat{\beta }}_2$.

10 To obtain the inflection point of the growth rate of the monetary aggregate when the country-specific dummy variable equals one, it is necessary to compute the first order derivative of leverage with respect to the monetary aggregate variable using Equation (7) and then equal to zero: that is, $\frac{dLE{V}_{it}}{dMAG{R}_{j,t-1}}=({\hat{\beta }}_1+{\hat{\gamma }}_H)+2({\hat{\beta }}_2+{\hat{\gamma }}_H)MAG{R}_{j,t-1}=0$, which implies that the optimal level of money supply at which leverage is maximized is: $MAG{R}_{j,t-1}=-({\hat{\beta }}_1+{\hat{\gamma }}_H)/2({\hat{\beta }}_2+{\hat{\gamma }}_H)$.

11 Some countries are not considered in this work, which requires the use of additional sources. We follow Berglof and Bolton (2002) to classify some Eastern European countries, whereas we code China as in Allen, Qian, and Qian (2005).

Additional information

Funding

We are grateful to the Ministerio de Economía y Competitividad (Grant ECO2013-45615-P) and to the Consejería de Educación, Junta de Castilla y León (Grant SA069G18) for financial support.