Debt specialisation and diversification: International evidence

Summary

Focus

We study the variation across firms' use of bond financing relative to financing through loan facilities and examine firm-level characteristics that may help explain such cross-firm financing variation. We contrast the debt specialisation and diversification of US firms with that of firms in Asia – a region with rapidly growing bond markets.

Contribution

Why do some firms borrow using only revolving credit facilities while others borrow exclusively through privately placed bonds? Why does bank debt comprise 90% of some firms' debt while publicly traded bonds comprise 90% of other firms' debt? We contribute to the large literature that asks these and similar questions, investigating the debt composition of more than 100,000 firm-year observations in the United States and across nine Asian markets.

Findings

We uncover a strong U-shape in bond financing by US firms. Small firms and large firms tend to use much more bond financing relative to loan financing than do mid-size firms. There is no corresponding U-shape in less developed Asian markets, while the advanced markets of Hong Kong SAR and Korea are in the middle. These patterns – and, more generally, the cross-firm variation in firms' use of bond financing relative to financing through loan facilities – are largely unrelated to either credit quality or monitoring effectiveness. Instead, we argue that market segmentation drives these shapes.

Abstract

We uncover a strong U-shape in bond financing by US firms. Firms with total debt in the range of $10 million to $100 million tend to use much less bond financing relative to loan financing than do firms with more or less total debt. There is no corresponding U-shape in less-developed Asian markets, while the advanced markets of Hong Kong SAR and Korea are in the middle. These patterns, and more generally the cross-firm variation in firms' use of bond financing relative to financing through loan facilities, are largely unrelated to either credit quality or monitoring effectiveness. This suggests that market segmentation is more likely. Finally, we find evidence of debt diversification by highly-leveraged firms.

JEL codes: G30, G32

Keywords: corporate bonds, capital structure, firm financing, debt specialisation, debt diversification