The Financial Crisis And Corporate Debt Maturity: The Role Of Banking Structure

The ﬁnancial crisis and corporate debt maturity: The role of

banking structure

Víctor M. González ⁎

University of Oviedo, Department of Business Administration, Avda. del Cristo s/n, 33071 Oviedo, Spain

article info abstract

Article history:

Received 24 February 2015

Received in revised form 1 October 2015

Accepted 3 October 2015

Available online 12 October 2015

This paper analyses the inﬂuence of the ﬁnancial crisis on corporate debt maturity for 39 coun-

tries during the period 1995–2012. The results reveal the importance of the dependence of

ﬁrms on external ﬁnance and the banking structure of the countries on debt maturity during

the ﬁnancial crisis. Corporate debt maturity was found to decline during the ﬁnancial crisis.

However, only those ﬁrms that were more dependent on external ﬁnance before the onset

of the ﬁnancial crisis suffered this reduction. The reduction in corporate debt maturity is the

result of a higher average increase in short-term debt than in long-term debt. The ﬁnancial cri-

sis had a stronger negative effect on corporate debt maturity in countries with less bank con–

centration, while the debt maturity of larger ﬁrms decreased less as a result of the ﬁnancial

crisis than the debt maturity of smaller ﬁrms in countries where banks play an important

role in the ﬁnancing of the private sector.

JEL classiﬁcation:

G18

G32

Keywords:

Financial crisis

Debt maturity

Institutions

Banking structure

1. Introduction

The global ﬁnancial crisis is considered by many economists the worst ﬁnancial crisis since the Great Depression of the 1930s.

The current crisis has opened up an interesting debate regarding its consequences for the real economy. Financial institutions fac-

ing losses may reduce the availability of credit and increase the cost of accessing credit. During the ﬁnancial crisis, this resulted in

a credit crunch that played a crucial role in the failure of businesses, a decline in consumer wealth and a downturn in economic

activity leading to the 2008–2012 global recession and contributing to the European sovereign-debt crisis. An important strand of

papers analysing the consequences of the ﬁnancial crisis has focused on its inﬂuence on the lending channel. Most papers have

shown that ﬁrm leverage and investment decreased as a consequence of the ﬁnancial crisis.

In this context, the aim of this paper is to study the impact of the current crisis on one aspect of capital structure, namely

corporate debt maturity, analysing whether corporate debt maturity decreased as a result of the ﬁnancial crisis in line with the

imposition of more stringent credit conditions for borrowers. The paper also considers how dependence on external ﬁnance

and country-level determinants inﬂuence the effect of the ﬁnancial crisis on debt maturity.

In contrast to the majority of previous papers analysing the impact of the ﬁnancial crisis on the real economy, we consider the

inﬂuence of the ﬁnancial crisis within an international context.

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Fig. 1 shows the differences in the average ratio of long-term debt

to total debt before and during the crisis for each country. The average ratio of long-term debt to total debt is calculated for the

Journal of Corporate Finance 35 (2015) 310–328

⁎Tel.: +34 985102826; fax: +34 985103708.

E-mail address: vmendez@uniovi.es.

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Most of this literature has focused on the inﬂuence of the ﬁnancial crisis within the US context (Almeida et al., 2011; Duchin et al., 2010; Ivashina and Scharfstein,

2010;andSantos, 2011, among others). The exception are the papers by Campello et al. (2010),Carvalho et al. (forthcoming) and Lins et al. (2013), which analyse the

impact of the crisis on real decisions made by corporations in an international context.

http://dx.doi.org/10.1016/j.jcorpﬁn.2015.10.002

Contents lists available at ScienceDirect

Journal of Corporate Finance

journal homepage: www.elsevier.com/locate/jcorpfin

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South Korea

US

India

Sweden

Australia

Canada

Norway

Argentina

Switzerland

Japan

Taiwan

UK

Israel

Finland

Thailand

New Zealand

Singapore

Indonesia

Denmark

South Africa

Italy

Pakistan

Turkey

Peru

Malaysia

Mexico

France

Spain

Hong Kong

Germany

Philippines

Belgium

Ireland

Netherlands

Greece

Chile

Brazil

Portugal

Austria

Fig. 1. Differences in debt maturity across countries during the ﬁnancial crisis. This ﬁgure represents the difference between the average long-term debt to total debt ratio before (1995–2007) and during (2008–2012) the

crisis for the countries included in our sample. Long-term debt is debt with a maturity of more than one year.

Data from the Worldscope database.

311V.M. González / Journal of Corporate Finance 35 (2015) 310–328

periods 1995–2007 and 2008–2012 for each country. Differences in debt maturity can be seen to vary widely across countries. For

example, the average percentage of long-term debt for ﬁrms in South Korea, the USA and India decreased 7% during the crisis

compared to average values prior to 2008. However, the average percentage of long-term debt increased sharply as a result of

the ﬁnancial crisis in countries such as Austria, Portugal and Brazil. In fact, the debt maturity of ﬁrms increased in more than

half of the countries included in the sample. This evidence thus reveals that the variation in corporate debt maturity during

the ﬁnancial crisis may be affected by differences in country characteristics.

The contribution of the paper comprises the analysis of the inﬂuence of the ﬁnancial crisis on debt maturity in a large cross–

country panel of data for the period 1995–2012. We also study whether the effect of the ﬁnancial crisis on corporate debt matu–

rity is affected by ﬁrm- and country-level determinants of debt maturity. In particular, we investigate whether this effect exists

depending on the dependence of ﬁrms on external ﬁnance and on the banking structure of the country. First, Dell’Ariccia et al.

(2008) and Duchin et al. (2010) provide evidence consistent with the bank lending supply shock being the origin of the reduction

in performance or investment following banking crises. However, Kahle and Stulz (2013) show a decrease in borrowing and cap–

ital expenditures for US industrial ﬁrms that is not a consequence of a bank lending or credit supply shock. Within this context,

we use the changes in corporate debt maturity during the crisis to investigate whether these changes are in line with a credit

supply or a demand effect. Second, as the ﬁnancial crisis had an important impact on the solvency of banks, the weight of

bank credit in the ﬁnancing of the private sector and bank concentration might inﬂuence the credit standards set by banks.

We are not aware of any other study that has investigated the impact of the global ﬁnancial crisis on corporate debt maturity

within an international context.

2

Almeida et al. (2011) test whether US ﬁrms with large fractions of their long-term debt maturing

at the time of the crisis present more pronounced negative outcomes than otherwise similar ﬁrms. Firms whose long–term debt

was maturing right after the onset of the crisis cut their investment rates more than other ﬁrms did. However, these authors do

not analyse the effect of ﬁnancial crisis on corporate debt maturity or how ﬁrm and country characteristics inﬂuence the effect of

the ﬁnancial crisis on debt maturity.

The ﬁndings of the present paper are consistent with a small reduction in corporate debt maturity as a result of the ﬁnancial

crisis. However, this result conceals differences according to ﬁrm dependence on external ﬁnance and institutional features of the

countries. Our ﬁndings show that the ﬁnancial crisis had a negative effect on corporate debt maturity for those ﬁrms with a great-

er dependence on external ﬁnance and in countries with lower levels of efﬁciency of the legal system and bank concentration. We

thus show that the variation in corporate debt maturity during the ﬁnancial crisis is consistent with a credit supply shock, as only

ﬁrms that have more dependence on external ﬁnance suffered reductions in debt maturity following the onset of the crisis.

Furthermore, our results reveal that bank concentration helped to reduce the negative impact of the ﬁnancial crisis on corporate

debt maturity. This result is consistent with the idea that ﬁrms in less concentrated credit markets are subject to greater ﬁnancial

constraints (Berlin and Mester, 1999; Petersen and Rajan, 1995) and in keeping with the beneﬁts of relationship banking. How-

ever, the negative effect of the ﬁnancial crisis on corporate debt maturity was greater in countries where the weight of banks in

the economy is signiﬁcant, affecting mainly smaller ﬁrms. Finally, our results are robust to the use of alternative measures of the

ﬁnancial crisis and reveal that the effect of the crisis on corporate debt maturity was greater during the period 2010–2011. We

also provide evidence that the effect of the ﬁnancial crisis on corporate debt maturity depends on the intensity of the ﬁnancial

crisis. In fact, ﬁrms in those countries where the decline in economic activity or the percentage of nonperforming loans are higher

present a greater reduction in debt maturity.

The rest of the paper presents a review of the literature and discusses the implications tested in Section 2,whileSection 3 de-

scribes the database and methodology employed. Section 4 discusses the empirical results and Section 5 provides robustness tests.

Finally, Section 6 concludes the paper.

2. Literature review

The global ﬁnancial crisis has opened up a debate regarding its consequences for the real economy. In this context, several pa-

pers have analysed the impact of the ﬁnancial crisis on the lending channel. Chari et al. (2008) call into question the way in which

the ﬁnancial crisis has affected the economy, showing that the crisis is not associated with a decline in bank lending. However,

Ivashina and Scharfstein (2010) show that syndicated lending started to decline in mid-2007 and fell sharply during the bank

panic that began in September 2008 for US ﬁrms.

3

They also highlight that there was a simultaneous run by borrowers who

drew down their lines of credit, leading to an increase in loans reported on bank balance sheets. Their paper also shows that

some banks were more adversely affected than others were. In fact, banks with more deposit ﬁnancing cut their syndicated lend–

ing less than banks without access to this more stable source of funding.

Evidence has not only revealed that lending has reduced as a consequence of the crisis, but that it has also led to an increase in

borrowing costs and changes in investment decisions. Santos (2011) shows that ﬁrms paid higher loan spreads during the

2

Deesomsak et al. (2009) investigate the effects of ﬁrm-speciﬁc and country-speciﬁc characteristics and the 1997 Asian ﬁnancial crisis on the debt maturity structure

of ﬁrms in the Asia Paciﬁc region (Thailand, Malaysia, Singapore and Australia), comparing the consequences of the crisis for these four countries. Their paper reveals

that the crisis had several signiﬁcant effects on both ﬁrm-speciﬁc and market-wide determinants of debt maturity, especially in Thailand and Malaysia, where the crisis

originated.

3

The bank lending survey by the European Central Bank (ECB) shows that the ﬁnancial crisis also reduced the credit issued by banks in European countries. This sur–

vey is addressed to senior loan ofﬁcers of a representative sample of euro area banks and is conducted four times a year. The sample group participating in the survey

comprises around 90 banks from all euro area countries and takes into account the characteristics of their respective national banking structures. Detailed information

on the survey and results are available at https://www.ecb.europa.eu/stats/money/surveys/lend/html/index.en.html.

312 V.M. González / Journal of Corporate Finance 35 (2015) 310–328

subprime crisis and that the increase in loan spreads was higher for ﬁrms which borrowed from banks that incurred greater

losses. In a survey of 1050 CFOs, Campello et al. (2010) ﬁnd that more than half the respondents cancelled or postponed their

planned investments because of ﬁnancial constraints during the crisis. Furthermore, their evidence indicates that constrained

ﬁrms report signiﬁcantly larger planned percentage cuts compared to their peers in technology and capital spending and employ-

ment. Carvalho et al. (forthcoming) show that the 2007–2009 ﬁnancial crisis is associated with equity valuation losses and invest–

ment cuts to borrower ﬁrms with the strongest lending relationships with banks. Almeida et al. (2011) reveal that US ﬁrms

whose long-term debt was largely maturating immediately after the third quarter of 2007 cut their investment-to-capital ratio

more than other similar ﬁrms whose debt was due well after the crisis. Duchin et al. (2010) also reveal that corporate investment

by US ﬁrms declined signiﬁcantly following the onset of the ﬁnancial crisis and this decline was greater for ﬁrms dependent on

external ﬁnance. In line with this evidence, Vermoesen et al. (2013) report that Belgium ﬁrms which, at the start of the crisis, had

a larger part of their long–term debt maturing within the next year experienced a signiﬁcantly larger drop in investments in 2009.

Moreover, this effect was mainly driven by ﬁrms which are more likely to be ﬁnancially constrained. Lins et al. (2013) show that

family-controlled ﬁrms underperformed signiﬁcantly compared to other ﬁrms during the global ﬁnancial crisis using a sample of

8584 ﬁrms from 35 countries. All the above evidence thus reveals the important effects of the ﬁnancial crisis on the lending chan-

nel, providing support for the existence of signiﬁcant supply constraints in terms of both quantity and the price of the credit lead-

ing to reductions in investment rates.

In this context, the present paper analyses the inﬂuence of the recent ﬁnancial crisis on corporate debt maturity. Ivashina and

Scharfstein (2010) and Campello et al. (2012) reveal that credit lines became particularly important during the ﬁrst quarters of

the ﬁnancial crisis, as they replaced bank loans, providing the liquidity needed to invest during the crisis and ameliorating the

negative impact of scarce credit on real activities. As most credit lines have a shorter maturity than bank loans (Jiménez et al.,

2007),

4

we expect the ﬁnancial crisis to be associated with a shortening of corporate debt maturity. Moreover, the imposition

of more stringent credit standards by banks, substituting long-term loans by shorter loans due to the solvency problems suffered

by banks, may also lead to a reduction in debt maturity. Consequently, our ﬁrst hypothesis is as follows:

H1. The ﬁnancial crisis has reduced corporate debt maturity as a result of the use of shorter debt.

However, we expect the inﬂuence of the ﬁnancial crisis on corporate debt maturity not to have an equally detrimental effect

on all ﬁrms and that the observed differences in debt maturities will depend on the dependence on external ﬁnance and on the

structure of the banking system in each economy.

The inﬂuence of ﬁnancial crises on corporate borrowing and investment may be explained from two alternative theories. On

the one hand, credit supply shock theory poses that the credit system does not renew loans as a response to a shock in the ﬁnan-

cial system

5

(Brunnermeier, 2009; Shleifer and Vishny, 2010). According to this view, debt issuance and corporate investment

should fall more for credit-dependent ﬁrms. On the other hand, the effect of the ﬁnancial crises on the real economy could be

the result of a demand shock (Kahle and Stulz, 2013). According to this theory, increases in uncertainty and decreases in the de–

mand for products following ﬁnancial crises lead to a decrease in investment and hence in demand for credit to ﬁnance invest-

ment. Dell‘Ariccia et al. (2008) offer evidence that there is a real cost to banking crises, as sectors that are more dependent on

external ﬁnance perform relatively worse during banking crises. Duchin et al. (2010) also provide evidence in line with a credit

supply shock, as the decline in corporate investment following the recent ﬁnancial crisis is higher for ﬁrms that have low cash

reserves or high net short–term debt, are ﬁnancially constrained or operate in industries dependent on external ﬁnance. However,

Kahle and Stulz (2013) show evidence that is not in line with the view that a bank lending supply shock or a credit supply shock

constitute predominant casual factors to explain the ﬁnancial and investment policies of ﬁrms during the recent crisis. In this con-

text, our second hypothesis is the following:

H2. The reduction in debt maturity would be higher for ﬁrms with a greater dependence on external ﬁnance before the crisis if

credit supply shock is the dominant effect.

Access to external ﬁnancing will partly depend on the banking structure of each economy. Banks are central to business activ-

ity, as they are the main providers of debt ﬁnancing in most economies. Financial intermediaries directly inﬂuence corporate

ﬁnancial structure. They have advantages in collecting information (Diamond, 1984) and incentives to use this information to

discipline borrowers due to the fact that they beneﬁt from economies of scale in obtaining information and do not suffer from

free-rider problems.

Speciﬁcally, we consider that the banking structure of the country might inﬂuence the effect of the ﬁnancial crisis on corporate

debt maturity. Fan et al. (2012) report a negative effect of the weight of banks in the economy on debt maturity as a result of

bank preferences for short-term debt. Demirgüç-Kunt and Maksimovic (1999) also stress that short-term debt allows banks to

use their advantages in monitoring borrowers. Short-term debt forces lenders to monitor corporate performance more frequently

and enables the bank to change the terms of contract or not to renew the loan (Diamond, 1991; Rajan, 1992). Large ﬁrms have

better access to domestic and international markets and are therefore usually less dependent on domestic bank credit. However,

as they are subject to more ﬁnancing constraints, smaller ﬁrms will be affected to a greater extent by bank preferences. Conse-

quently, we expect a negative relationship between the weight of banks in the economy and corporate debt maturity, particularly

4

Campello et al. (2012) ﬁnd that the maturity of credit lines in their sample for European and US ﬁrms is about 30 months before the crisis, while it is about

27 months during the crisis (2008–2009).

5

A more speciﬁc theory is the bank supply shock theory, in which banks are the ones that reduce the supply of loans as a result of a shock in the ﬁnancial system.

313V.M. González / Journal of Corporate Finance 35 (2015) 310–328

in the case of smaller ﬁrms. We forecast that this negative relationship will be stronger during the ﬁnancial crisis, as bank difﬁ–

culties lead banks to lend on a shorter-term basis, replacing long-term by short-term debt. In line with the above arguments, our

third hypothesis is as follows:

H3. The weight of bank credit in the ﬁnancing of the private sector had a more negative effect on corporate debt maturity during

the ﬁnancial crisis, especially in the case of smaller ﬁrms.

The banking literature suggests that bank concentration has two potential effects on ﬁrm leverage. In a market without asym-

metric information, there will be a negative relationship between bank concentration and ﬁrm leverage given that higher bank

market power results in a higher price for debt and less credit availability. However, in markets with asymmetric information,

higher bank market concentration may increase the incentives of banks to invest in the acquisition of soft information by estab–

lishing close relationships with borrowers over time. This will lead to greater availability of credit, thus reducing corporate ﬁnan-

cial constraints (Boot, 2000; Dell‘Ariccia and Marquez, 2004).

The importance of bank concentration has been argued by Petersen and Rajan (1995) and Berlin and Mester (1999). These authors

show that US ﬁrms in less concentrated credit markets are subject to greater ﬁnancial constraints. They offer evidence from small

business data indicating that creditors are more likely to ﬁnance credit-constrained ﬁrms when credit markets are concentrated be–

cause it is easier for these creditors to internalize the beneﬁts of assisting ﬁrms. More recently, Barath et al. (2011) show the beneﬁts

of borrowing from relationship lenders even for large ﬁrms with a much wider choice of ﬁnancing options available. The existence of a

positive relationship between bank concentration and credit availability is in line with the fact that relationship banking serves to mit-

igate information asymmetries between creditors and debtors. Given that long-term debt is subject to greater information

asymmetries than short-term debt, the positive effect of bank concentration on leverage could be concentrated in long-term debt.

Thus, a positive relationship might be assumed between bank concentration and debt maturity. From this point of view, the ﬁnancial

crisis could have a weaker effect on corporate debt maturity because of the beneﬁts of relationship banking in those countries where

bank concentration is higher, seeing as increased competition is likely to erode the beneﬁts of relationship lending. However, given

that the ﬁnancial crisis has affected the solvency of banks, it could also result in the rupture of bank–ﬁrm relationships. As both

types of relation are theoretically possible, we make no a priori forecast as to whether relationship banking has increased or decreased

as a result of the ﬁnancial crisis, treating it as an empirical issue.

3. Databases, methodology and variables

Our source for ﬁrm data is the Worldscope database, which contains ﬁnancial statement data and stock prices from many

314 V.M. González / Journal of Corporate Finance 35 (2015) 310–328