How does long-term finance affect economic volatility?

Asli Demirguc-Kunt, Balint L. Horvath, Harry Huizinga*

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

Abstract

In an approach analogous to Rajan and Zingales (1998), we examine how the ability to access long-term debt affects firm-level growth volatility. We find that firms in industries with stronger preference to use long-term finance relative to short-term finance experience lower growth volatility in countries with better-developed financial systems, as these firms may benefit from reduced refinancing risk. Institutions that facilitate the availability of credit information and contract enforcement mitigate refinancing risk and therefore growth volatility associated with short-term financing. Increased availability of long-term finance reduces growth volatility in crisis as well as non-crisis periods. (C) 2017 Elsevier B.V. All rights reserved.

Original languageEnglish
Pages (from-to)41-59
JournalJournal of Financial Stability
Volume33
DOIs
Publication statusPublished - Dec 2017

Keywords

  • Debt maturity
  • Financial dependence
  • Firm volatility
  • Financial development
  • COSTLY STATE VERIFICATION
  • DEBT MATURITY
  • LIQUIDITY RISK
  • GROWTH
  • INTERMEDIATION
  • CONTRACTS
  • MARKETS
  • CRISIS
  • FIRM
  • CONSTRAINTS

Cite this

Demirguc-Kunt, Asli ; Horvath, Balint L. ; Huizinga, Harry. / How does long-term finance affect economic volatility?. In: Journal of Financial Stability. 2017 ; Vol. 33. pp. 41-59.
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abstract = "In an approach analogous to Rajan and Zingales (1998), we examine how the ability to access long-term debt affects firm-level growth volatility. We find that firms in industries with stronger preference to use long-term finance relative to short-term finance experience lower growth volatility in countries with better-developed financial systems, as these firms may benefit from reduced refinancing risk. Institutions that facilitate the availability of credit information and contract enforcement mitigate refinancing risk and therefore growth volatility associated with short-term financing. Increased availability of long-term finance reduces growth volatility in crisis as well as non-crisis periods. (C) 2017 Elsevier B.V. All rights reserved.",
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author = "Asli Demirguc-Kunt and Horvath, {Balint L.} and Harry Huizinga",
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How does long-term finance affect economic volatility? / Demirguc-Kunt, Asli; Horvath, Balint L.; Huizinga, Harry.

In: Journal of Financial Stability, Vol. 33, 12.2017, p. 41-59.

Research output: Contribution to journalArticleScientificpeer-review

TY - JOUR

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N2 - In an approach analogous to Rajan and Zingales (1998), we examine how the ability to access long-term debt affects firm-level growth volatility. We find that firms in industries with stronger preference to use long-term finance relative to short-term finance experience lower growth volatility in countries with better-developed financial systems, as these firms may benefit from reduced refinancing risk. Institutions that facilitate the availability of credit information and contract enforcement mitigate refinancing risk and therefore growth volatility associated with short-term financing. Increased availability of long-term finance reduces growth volatility in crisis as well as non-crisis periods. (C) 2017 Elsevier B.V. All rights reserved.

AB - In an approach analogous to Rajan and Zingales (1998), we examine how the ability to access long-term debt affects firm-level growth volatility. We find that firms in industries with stronger preference to use long-term finance relative to short-term finance experience lower growth volatility in countries with better-developed financial systems, as these firms may benefit from reduced refinancing risk. Institutions that facilitate the availability of credit information and contract enforcement mitigate refinancing risk and therefore growth volatility associated with short-term financing. Increased availability of long-term finance reduces growth volatility in crisis as well as non-crisis periods. (C) 2017 Elsevier B.V. All rights reserved.

KW - Debt maturity

KW - Financial dependence

KW - Firm volatility

KW - Financial development

KW - COSTLY STATE VERIFICATION

KW - DEBT MATURITY

KW - LIQUIDITY RISK

KW - GROWTH

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KW - CONTRACTS

KW - MARKETS

KW - CRISIS

KW - FIRM

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