We investigate capital structures and debt maturities of firms in Europe.
Europe is different from the rest of the world as major European economies have
bank-based financial systems and European emerging markets are integrating with
them through accession. We analyse how the concurrent development of the
banking system and securities markets affect companies' access to external
finance. In EU-15 countries with bank based and developed financial systems,
firms' capital structure is sensitive to the size of the banking sector only.
In Accession Countries capital structure changes towards debt financing as they
move towards a bank based system with reduced stock market activity and
declining interest rates. In EU-15 countries debt maturity increases via
banking sector development and via competition with equity funding, which
becomes available with stock market development. In accession countries debt
maturity increases as countries join the EU. FDI inflows providing equity
financing, substitute for long term debt and reduce debt maturity of accession
firms. Overall we observe that FDI is a significant source of external finance
for Accession firms in the absence of well established stock markets and
banking systems. We also show small European firms increase equity financing as
a result of higher FDI inflows as well. European companies that fail to benefit
from FDI inflows eventually fail to survive the transition to a new economic
regime and an integrated Europe.
October 19, 2009