Ahmed Usman

Financial health of the banks and bonds issuance by non-financial firms: The role of financial architecture

Abstract:
There has been a noticeable decrease in the bank lending after the Global Financial Crisis 2007. This credit rationing had severe consequences for non-financial firms across the globe and firms that had access to bond markets compensated the decrease in the availability of bank lending, by raising more funds through issuing bonds. We construct a novel dataset which contains information about firm-bank linkages and the financial health of both lenders (banks) and borrowers (firms) and ask an important policy question. After controlling for the riskiness of the banks and the firms, can financial architecture of the country explain the bonds issuance decisions of non-financial firms? If yes, does higher growth firms (whose future growth opportunities are duly recognized by the investors) perform any better than their peers? Our findings suggest that with an increase in the market risk of the banks of the firms after the crisis, higher growth firms face lower spreads and these firms issue larger volumes of bonds (an increase in intensive margins) and also issue higher number of bonds (an increase in extensive margins). Most importantly, we find that these higher growth firms outperform their peers along cost of debt and intensive and extensive margins only in market-oriented countries and not in bank-oriented economies. We make sure that our results are only driven by the financial architecture of the country of the firm and not by other macroeconomic variables. Our results reflect the supply-side effects of the capital, as we carefully control for firm’s demand for credit and any shock to the firm’s productivity as well. Our results confirm the most important finding of this study that financial architecture of the country is one the most important determinants of capital structure of non-financial firms.

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