Effects of institutional quality and the development of the banking system on corporate debt

Authors

  • Alvaro Edmundo Tresierra Faculty of Economics and Business, Universidad de Piura, Piura, Peru
  • Sergio David Reyes Faculty of Economics and Business, Universidad de Piura, Piura, Peru

Keywords:

Stock market, Banking system, Factorial analysis, GMM-SYS, Institutionality, Maturity of debt

Abstract

Purpose. This study aims to determine if the quality of national institutions and banking development condition the maturity of debt depending on the horizon of short or long term.

Design/methodology/approach. Analysis is performed on a sample of 116 nonfinancial companies from Peru and Brazil. The measures of quality of national institutions and banking development were obtained from World Bank data and included factorial analysis for dynamic considerations.

Findings. The findings, through the treatment of pointed indicators, the factor analysis and the subsequent estimation of a dynamic econometric model, called GMM-SYS, show that institutional quality fosters the maturity of long-term debt and banking development boots short-term financial relations.

Research limitations/implications. Evaluating different measures of the quality of national institutions and banking development is necessary to demonstrate the robustness of the results beyond the sample evaluated in Latin America.

Practical implications. The research allows to understand the interaction between national institutions and system banking through debt maturity, and this is useful for establishing common target between both groups.

Social implications. It is important for corporate finance to understand the mechanisms of the interaction between national institutions and system banking, because this affects internal decisions of firms regarding financial implications.

Originality/value. The treatment of measures of national institutions and banking development include dynamic considerations, and the application of this study in Latin America provides new findings regarding these kind of indexes and their interaction with firms¨ features such as debt maturity.

Doi: https://doi.org/10.1108/JEFAS-03-2017-0053

Downloads

Download data is not yet available.

References

Alves, P. and Francisco, P. (2015), “The impact of institutional environment on the capital structure of firms during recent financial crises”, The Quarterly Review of Economics and Finance, Vol. 57, pp. 129-146.

An, Z., Li, D. and Yu, J. (2016), “Earnings management, capital structure, and the role of institutional environments”, Journal of Banking & Finance, Vol. 68, pp. 131-152.

Anderson, R., Mansi, S. and Reeb, D. (2003), “Founding family ownership and the agency cost of debt”, Journal of Financial Economics, Vol. 68 No. 2, pp. 263-285.

Antoniou, A., Guney, Y. and Paudyal, K. (2006), “The determinants of debt maturity structure: evidence from France, Germany and the UK”, European Financial Management, Vol. 12 No. 2, pp. 161-194.

Awartani, B., Belkhir, M., Boubaker, S. and Maghyereh, A. (2015), “Corporate debt maturity in the MENA region: does institutional quality matter?”, International Review of Financial Analysis, Vol. 46, pp. 309-325.

Barclay, M. and Smith, C.W. Jr (1996), “On financial architecture: leverage, maturity, and priority”, Journal of Applied Corporate Finance, Vol. 8 No. 4, pp. 149-167.

Barnea, A.N., Hauguen, R.A. and Senbet, L.W. (1980), “A rationale for debt maturity structure and call provisions in the agency theoretic framework”, Journal of Finance, Vol. 35 No. 5, pp. 1223-1234.

Castro, P., Tascón, M., Amor, B. and De Miguel, A. (2016), “Target leverage and speed of adjustment along the life cycle of European listed firms”, Business Research Quarterly, Vol. 19 No. 3, pp. 188-205.

Childs, P., Mauer, D. and Ott, S. (2005), “Interactions of corporate financing and investment decisions: the effects of agency conflicts”, Journal of Financial Economics, Vol. 76 No. 3, pp. 667-690.

Davydov, D. (2016), “Debt maturity and corporate performance in emerging markets”, Research of International Business and Finance, Vol. 38, pp. 299-311.

Deesomsak, R., Paudyal, K. and Pescetto, G. (2009), “Debt maturity structure and the 1997 Asian financial crisis”, Journal of Multinational Financial Management, Vol. 19 No. 1, pp. 26-42.

Demirguc-Kunt, A. and Maksimovic, V. (1999), “Institutions, financial markets, and firm debt maturity”, Journal of Financial Economics, Vol. 54 No. 3, pp. 295-336.

Fan, J.P.H., Wei, J.K.C. and Xu, X. (2011), “Corporate finance and governance in emerging markets: a selective review and agenda for future research”, Journal of Corporate Finance, Vol. 17 No. 2, pp. 207-214.

Fan, J.P.H., Titman, S. and Twite, G. (2012), “An international comparison of capital structure and debt maturity choices”, Journal of Financial and Quantitative Analysis, Vol. 47 No. 1, pp. 23-56.

Fosu, S., Danso, A., Ahmad, W. and Coffie, W. (2016), “Information asymmetric, leverage and firm value: do crisis and growth matter?”, International Review of Financial Analysis, Vol. 46, pp. 140-150.

Gonzales, V.M. (2015), “The financial crisis and corporate debt maturity: the role of banking structure”, Journal of Corporate Finance, Vol. 35, pp. 310-328.

Gonzales, V.M. and Gonzales, F. (2008), “Influence of bank concentration and institutions on capital structure: new international evidence”, Journal of Corporate Finance, Vol. 14 No. 4, pp. 363-375.

Gungoraydinoglu, A. and Oztekin, O. (2011), “Firm – and country – level determinants of corporate leverage: some new international evidence”, Journal of Corporate Finance, Vol. 17 No. 5, pp. 1457-1474.

Hart, S. (1995), “A natural – resource based view of the firm”, The Academy of Management Review, Vol. 20 No. 4, pp. 986-1014.

Kane, A., Marcus, A.J. and McDonald, R.L. (1985), “Debt policy and the rate of return premium to leverage”, Journal of Financial Quantitative Analysis, Vol. 20 No. 4, pp. 479-499.

King, R. and Levine, R. (1993), “Finance, entrepreneurship, and growth: theory and evidence”, Journal of Monetary Economics, Vol. 32 No. 3, pp. 513-542.

Kirch, G. and Soares, P. (2012), “Determinats of corporate debt maturity in South America: do institutional quality and financial development matter?”, Journal of Corporate Finance, Vol. 18 No. 1, pp. 980-993.

Košak, M., Li, S., Loncarski, I. and Marinc, M. (2015), “Quality of bank capital and bank lending behavior during the global financial crisis”, International Review of Financial Analysis, Vol. 37, pp. 168-183.

La Porta, R., Lopez de Silanes, F., Shleifer, A. and Vishny, R. (1998), “Law and finance”, The Journal of Political Economic, Vol. 106 No. 6, pp. 1113-1155.

Laeven, L., Ratnovski, L. and Tong, H. (2015), “Bank size, capital, and systemic risk: some international evidence”, Journal of Banking & Finance, Vol. 1, pp. S25-S29.

Modigliani, F. and Miller, M. (1958), “The cost of capital, corporation finance and the theory of investment”, The American Economic Review, Vol. 48 No. 3, pp. 261-297.

Myers, S. (1977), “Determinants of corporate borrowing”, Journal of Financial Economics, Vol. 5 No. 2, pp. 147-175.

Nasr, H., Boubaker, S. and Rouatbi, W. (2015), “Ownership structure, control contestability, and corporate debt maturity”, Journal of Corporate Finance, Vol. 35, pp. 265-285.

O’Connor, K.Y. and Yaghoubi, M. (2016), “The influence of cash flow volatility on capital structure and the use of debt of different maturities”, Journal of Corporate Finance, Vol. 38, pp. 18-36.

Stephan, A., Talavera, O. and Tsapin, A. (2011), “Corporate debt maturity choice in emerging financial markets”, The Quarterly Review of Economics and Finance, Vol. 51 No. 2, pp. 141-151.

Yung, K., Diane, D. and Jian, Y. (2015), “The value of corporate financial flexibility in emerging countries”, Journal of Multinational Financial Management, Vols 32-33, pp. 25-41.

Zhang, S. (2016), “Institutional arrangements and debt financing”, Research in International Business and Finance, Vol. 36, pp. 362-372.

Downloads

Published

2018-06-01

How to Cite

Tresierra, A. E. ., & Reyes, S. D. . (2018). Effects of institutional quality and the development of the banking system on corporate debt. Journal of Economics, Finance and Administrative Science, 23(44), 113–124. Retrieved from https://revistas.esan.edu.pe/index.php/jefas/article/view/115