The maturity structure of debt : determinants and effects on firms' performance : evidence from the United Kingdom and Italy

Firms tend to match assets with liabilities, and more profitable firms have more long-term debt. Long-term debt has a positive effect on firms' performance, but this is not true when a large fraction of that debt is subsidized. Schiantarelli and Sembenelli empirically investigate the determinants and consequences of the maturity structure of debt using data from a panel of U.K. and Italian firms.

They find that in choosing a maturity structure for debt, firms tend to match assets and liabilities, as both conventional wisdom and some recent theoretical models suggest. They conclude that more profitable firms (as measured by the ratio of cash flow to capital) tend to have more long-term debt. This finding is consistent with the dominant role played by firms' fear of liquidation and loss of control associated with short-term debt. It may also reflect the willingness of financial markets to provide long term finance only to quality firms.

The data do not support the hypothesis that short term debt, through better monitoring and control, boosts efficiency and growth. If anything, the results support the opposite conclusion. In both countries the data suggest a positive relationship between initial debt maturity and the firms' subsequent medium term performance in terms of profitability and growth in real sales. In both countries total factor productivity depends positively on the length of debt maturity when the maturity variable is entered both contemporaneously and lagged.

But in Italy the positive effect of the length of maturity on productivity is substantially reduced or even reversed the larger is the proportion of subsidized credit.

Schiantarelli and Sembenelli document the relationship between firms' characteristics and their choice of shorter or longterm debt by estimating a maturity equation and interpreting the results in light of insights from theoretical literature, and by analyzing the effects of maturity on firms' later performance in terms of profitability, growth, and productivity. They estimate a Cobb-Douglas production function and assess how total factor productivity depends on the degree of leverage and the proportion of longer and short-term debt. They also analyse the relationship between firms' debt maturity and investment by estimating an accelerator type of investment equation, augmented by financial variables.

This paper - a product of the Finance and Private Sector Development Division, Policy Research Department - is part of a larger effort in the department to study the effects of financial structure on economic performance. The study was funded by the Bank's Research Support Budget under research project "Term Finance: Theory and Evidence" (RPO 67962). Copies of this paper are available free from the World Bank, 1818 H Street NW,Washington, DC 20433. Please contact Bill Moore, room N9038,telephone 2024738526, fax 2025221155, Internet address bmoore@worldbank.org. (40 pages)

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