This paper investigates private and public credit registries and legal creditor rights as determinants of corporate debt maturity in 45 countries. We find that information sharing among creditors and legal protection of creditor rights are associated with higher ratios of long-term corporate debt to total corporate debt. Information sharing acts as a substitute for creditor protection in lengthening debt maturity in less developed countries. Regulations requiring that both positive and negative credit information are distributed and that secured creditors are paid first in bankruptcy influence corporate debt maturity across countries.
A common problem faced by many firms around the world is the scarce availability of long-term sources of funds. Exclusive reliance on short-term borrowing may expose companies to illiquidity risks and reduce their overall growth potential. 1 To address these issues, many countries have embarked on policies promoting the development of long-term loan or bond markets with mixed results. However, while the negative implications of excessive short-term borrowing on growth and stability are well known (eg. Chang and Velasco, 2001 and Demirguc-Kunt and Maksimovic, 1998), there is no consensus on its underlying determinants and hence the main priorities for reform.
Under various assumptions, the decision to borrow at short-term maturities has been modelled in the corporate finance literature as a solution to debt-related agency problems (Barnea, Haugen and Senbet, 1980), or justified as a disciplinary tool to limit moral hazard (Rey and Stiglitz, 1993), as the result of coordination failures among banks (Dewatripont and Maskin, 1995), driven by the fear of early project termination by uninformed investors (Von Thadden, 1995), or as the consequence of illiquidity problems and inadequate regulation and institutions (Diamond and Rajan, 2000). In a signalling framework under asymmetric information, firms with favorable insider information may distinguish their quality by issuing short-term debt and roll it over, provided issuing costs are sufficiently high (Flannery, 1986, and Diamond, 1991). Although most existing empirical studies on corporate debt maturity focus on individual countries (mainly the US), there is a growing literature on how institutional differences across countries influence maturity choices (see, Dermirguc-Kunt and Maksimovic, 1999, and Giannetti, 2003). In the spirit of the law and finance literature initiated by La Porta, Lopez-de-Silanes, Shleifer and Vishny (LLSV, 1997), the above empirical papers capture the effects of legal systems by variables such as legal origins and corruption.
Recent research in the development of credit markets across countries shows that institutions facilitating sharing of credit information (such as public and private credit registries) or protecting creditor rights through the legal system foster the growth of private credit markets (LLSV, 1998; Jappelli and Pagano, 2002). Very little is known about how these institutions affect debt maturity. Djankov, McLiesh, and Shleifer (DMS, 2007) find that higher levels of information sharing among creditors and stronger creditor rights are associated with a larger private credit market relative to gross domestic product. In other words, both ex ante better information for creditors and ex post stronger creditor rights contribute to credit market expansion. Furthermore, institutions facilitating information sharing may be a substitute or stronger creditor protection in fostering credit market development as the former plays a relatively more important role in less developed countries with weaker legal systems (Bennardo, Pagano and Piccolo, 2009). Recent studies also find that information sharing helps lenders to select good borrowers (Pagano and Jappelli, 1993), overcome moral hazard of borrowers (Padilla and Pagano, 2000), reduce non-performing loans and the costs of firm financing (Brown, Jappelli and Pagano, 2009), reduce corruption in bank lending (Barth, Lin, Lin and Song, 2007), decrease bank risk-taking and lead to higher economic growth (Houston, Lin, Lin and Ma, 2010).
Absent in the literature is a study of the links between information sharing, creditor rights, and corporate debt maturity. This is somewhat surprising as both ex ante information acquisition via credit bureaus and ex post creditor powers in bankruptcy affect the contracting environment and are likely to have an important impact on firms? debt maturity structure across different countries. Our study aims to fill the gap between the two strands of literature by investigating the impact of institutions aiming at reducing credit information asymmetries and protecting creditor rights on the structure of corporate debt maturity using panel data from 45 countries. In particular, we focus on public and private credit bureaus and creditor powers in bankruptcy as determinants of debt maturity structure after controlling for the impact of legal enforcement, financial development and other macro and micro factors. The main findings of the paper can be summarized as follows. First, higher levels of information sharing (as proxied by the existence and coverage of private and public credit registries as well as the depth of credit information) are associated with a higher share of long-term debt as a proportion of total corporate debt in both developed and developing countries. The results are very robust with respect to alternative measures of information sharing, different control variables and different estimation methodologies. This suggests that information sharing helps increase the maturity horizon at which financial institutions feel safe to lend due to the reduction of problems of adverse selection and moral hazard in the bank-firm relationship. Second, countries with weaker legal protection of creditor rights or higher corruption are characterized by higher ratios of short-term debt to total debt in the corporate sector. This is consistent with the view that short-term lending acts as a valuable hedge against uncertainty or a disciplinary device from the lender?s perspective. Third, there exists an important interactive effect between information sharing and creditor rights, which supports the substitution hypothesis. More specifically, ex ante better information sharing among creditor mitigates the positive effect of ex post stronger creditor rights on debt maturity as both types of institutions help banks reduce credit risk and discipline borrowers. Consistent with DMS (2007), creditor protection is relatively more important in more developed countries. Fourth, certain aspects of credit bureaus and bankruptcy laws are particularly important for lengthening debt maturity. They include regulations requiring that both positive and negative credit information are distributed and that secured creditors are paid first in bankruptcy. Finally, macroeconomic environment and firm characteristics matter for corporate debt maturity. After unobserved heterogeneity across countries is controlled for, we find a higher ratio of long-term to total corporate debt in countries with more developed financial sector, higher GDP growth, lower inflation, or characterized by larger and more profitable firms. Overall, our findings suggest that promoting institutions and policies to improve levels of information sharing and creditor rights around the world is an important prerequisite for increasing access of firms to long-term finance.
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Information Sharing, Creditor Rights, and Corporate Debt Maturity
