Debt is a major source of external financing for large European firms. In 2007, corporate bonds and syndicated loans made up 94% of all public funds raised in the European capital markets, while public equity issuance accounted for only 6%. In recent years, developments in the corporate bond market have attracted considerable attention, particularly in the light of the market’s spectacular development in the aftermath of the introduction of the euro.
At the same time, the syndicated loan market has also developed, albeit more progressively, currently accounting for around one-third of borrowers’ total public debt and equity financing. Unquestionably, syndicated loans are the main alternative to direct corporate bond financing: In both markets, firms can tap the financial markets to raise large amounts of funds with medium and long-term maturities.
Today, many of Europe’s largest firms use corporate bonds and syndicated loans extensively and, often, simultaneously to finance their investments. In this paper, we investigate the factors that influence European firms’ marginal choice of issuing debt between these two sources of funding. Building on Denis and Mihov (2003), we concentrate on incremental financing decisions. This focus allows us to link the choice of debt market to the specific characteristics of firms measured prior to the financing decision.
From a theoretical perspective, corporate financing decisions are characterised by agency costs and asymmetric information problems. This would include the decision of whether to obtain direct financing via the corporate bond market or financing from banks through the syndicated loan market (Amaro de Matos (2001)). In the case of financing through the syndicated loan market, the theory of financial intermediation has placed special emphasis on the role of banks in monitoring and screening borrowers, which is costly for banks. However, it also has its advantages because the substantial investment that banks make in funding borrowers, as well as the longer-lasting nature of such relationships, increases the benefits to banks of information acquisition (Boot and Thakor (2008)).