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Annals of Finance
Published in: Annals of Finance 4/2018

19-04-2018 | Research Article

Debt financing in private and public firms

Authors: Kim P. Huynh, Teodora Paligorova, Robert Petrunia

Published in: Annals of Finance | Issue 4/2018

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Abstract

Using administrative confidential data on the universe of Canadian corporate firms, we compare debt financing choices of private and public firms. Private firms have higher leverage ratios, which are entirely driven by private firms’ stronger reliance on short-term debt. Further, private firms rely more of leverage during economic expansions, while public firms rely on equity financing. Specifically, private firms manage to increase their long-term debt during expansions, while short-term debt is used during downturns. Our findings have implications for a better understanding of the role of asymmetric information in private firms’ capital structure decisions.
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Appendix
Available only for authorised users
Footnotes
1
For example, private firms generate 90% of total sales and 90% of the employment in Canada. In the UK more than two-thirds of corporate assets are owned by private firms (Brav 2009).
 
2
The pecking order theory postulates that the cost of financing increases with asymmetric information (Myers and Majluf 1984). Companies prioritize their sources of financing, first preferring internal financing, followed by debt, and lastly raising equity as a “last resort.”
 
3
Using only public firms, Barclay and Smith (1995), Berger et al. (2005) and Custódio et al. (2013) show that firms with higher information asymmetry issue more short-term debt.
 
4
See Appendix A.2 for details.
 
5
We compare the total number of firms in COMPUSTAT with the number of firms in our sample. COMPUSTAT is widely used to conduct research on US and Canadian public firms. The total coverage of public firms in COMPUSTAT is 2869, or 82% of the population.
 
6
According to the PWC (2010), there were 731 IPOs for the period 2000–2008.
 
7
We use sales growth as opposed to the market-to-book ratio as a proxy for growth opportunities because private firms do not have market values. Both measures are conceptually different because the market-to-book ratio as a market-based measure contains forward-looking information, unlike firm-level sales growth.
 
8
See Appendix A.1 for definitions of short- and long-term debt.
 
9
The total number of observations in columns 2 and 3 is different because some firms have zero debt in column 2 and as a result the ratio of long-term debt to total debt cannot be computed.
 
10
This method has been widely used in corporate finance papers such as Michaely and Roberts (2012), Gao et al. (2013), Saunders and Steffen (2011) and Brav (2009) among others.
 
11
Carvalho (2015) shows that during industry downturns firms experience significantly greater valuation losses if their peers are financially constrained. Huynh et al. (2010) demonstrate that industry conditions impact firms’ operations and performance in a meaningful way.
 
12
Appendix A.3 provides details on this procedure.
 
13
NAICS 21, 22, 54 and 55 correspond to “Mining, quarrying, and oil and gas extraction, “Utilities,” “The Professional, Scientific, and Technical Services,” and “Management of Companies and Enterprises,” respectively. The complete list of industry definitions is available in Table 2.
 
14
The \(H_0: \sum \hbox {Unexp}=0\) row provides the F-statistic on the null hypothesis that the industry conditions do not affect private firms. The null hypothesis is \(({ Unexp}\;{ growth}+{ Unexp}\; { Growth}\times { Private})=0\) in columns 1–3, while in columns 4–6 the null hypothesis is \(({ Unexp}\; { volatility}+ { Unexp}\; { volatility} \times { Private})=0\).
 
15
For the \(\varPsi \) coefficients, this procedure is equivalent to having industry time-specific dummy variables in the firm growth Eq. (A.1) via the Frisch–Waugh–Lovell theorem see (Greene 2012).
 
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Metadata
Title
Debt financing in private and public firms
Authors
Kim P. Huynh
Teodora Paligorova
Robert Petrunia
Publication date
19-04-2018
Publisher
Springer Berlin Heidelberg
Published in
Annals of Finance / Issue 4/2018
Print ISSN: 1614-2446
Electronic ISSN: 1614-2454
DOI
https://doi.org/10.1007/s10436-018-0323-6

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