Economic development is unavoidably a series of wagers. Investments in physical, human and knowledge capital (R&D) are made with an expectation of return, but with cognizance of the accompanying risk. A recent literature (Acemoglu and Zilibotti 1997) has moved the inability of poor countries to diversify this risk combined with the indivisibility of many projects, as the central explanation for the perverse phenomenon of both low growth and high volatility.1 However, the issue remains germane for advanced countries: ongoing growth is thought to depend on investments in supplying specialized, hence inherently risky production inputs (see, for example Romer 1990 and Grossman and Helpman 1991).
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.
The appropriate response of a central banks interest rate policy to banking crises is the subject of a continuing and important debate. A standard view is that monetary policy should play a role only if a financial disruption directly affects inflation or the real economy; monetary policy should not be used to alleviate financial distress per se. Additionally, several studies on interlinkages between monetary policy and financial stability policy recommend the complete separation of the two, with evidence of higher and more volatile inflation rates in countries where the central bank is in charge of banking stability.
This view of monetary policy is challenged by observations that during a banking crisis, interbank interest rates often appear to be a key instrument used by central banks for limiting threats to financial stability. During the recent crisis starting in August 2007, interest rate setting in both the U.S. and the E.U. appeared to be geared heavily toward alleviating stress in the banking system. This also appears to be the case in previous financial disruptions, as Goodfriend (2002) states: Consider the fact that the Fed cut interest rates sharply in response to two of the most serious financial crises in recent years: the October 1987 stock market break and the turmoil following the Russian default in 1998. The practice of reducing interbank rates during financial turmoil also challenges the long debated view originated by Bagehot (1873) that central banks should provide liquidity to banks at high penalty interest rates (see Martin 2009, for example).
