## _wp07186

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### I. Introduction — research question and scope
- Research question: How do domestic financial reforms and improved access to international markets affect corporate leverage and debt maturity?
- Sample and period:
  - Publicly traded non-financial firms in 38 countries over the period 1994–2002.
  - Overall sample: 76,147 firm-year observations; 65,565 from advanced countries and 10,582 from emerging market countries.
  - Country composition: 22 advanced and 16 emerging market countries.
- Key measures:
  - Leverage = total debt / total assets.
  - Debt maturity = long-term debt / total debt.
  - Domestic financial reforms measured by Abiad, Detragiache and Tressel (2007) index (DFL) and six component indices; range between zero and one.
  - Financial openness proxied by the ratio of total private sector external liabilities to GDP (de facto international financial integration).

### III. Data and descriptive statistics
- Firm-level summary (Panel A, Table 1):
  - Mean leverage: emerging economies mean 0.31; advanced countries mean 0.26.
  - Mean debt maturity: emerging economies mean 42 percent; advanced countries mean 55 percent.
  - Sample winsorized at the 0.5 and 99.5 percentiles; financial firms (SIC 60–69) and utilities (SIC 40–49) excluded; firms required at least two years of data.
- Time series patterns (Panel B, Table 1 / Figure 1):
  - Financial openness and the DFL index increased over the sample period and are "about constant after 2000."
  - Example year values (selected):
    - Leverage (All sample): 1994 = 0.242; 2002 = 0.265.
    - Debt maturity (All sample): 1994 = 0.590; 2002 = 0.500.
    - Financial openness (All sample): 1994 = 0.464; 2002 = 0.783.
    - Financial liberalization index (All sample): 1994 = 0.792; 2002 = 0.860.

### IV. Methodology and controls
- Regression framework:
  - Dependent variables: firm leverage (LEV) and debt maturity (MAT).
  - Main regressors: lagged DFL index (or components) and lagged financial openness (FOPEN), lagged firm controls and lagged country controls.
  - Fixed effects: industry (2-digit SIC), country, and time; standard errors clustered by country; alternative firm fixed effects estimates reported.
  - Lag structure: all independent variables are lagged by one period.
- Firm-level controls:
  - Tobin’s Q (growth opportunities), log total assets (size), EBIT/total assets (profitability), tangibility (NPPE/total assets), asset maturity (Barclay-Marx-Smith style), stock return volatility; ADR and bond-rating dummies.
- Country-level controls:
  - GDP per capita (log PPP), GDP growth, GDP growth volatility (5-year sd), inflation (and high-inflation dummy), stock market share turnover, banking crisis dummy.
  - Additional robustness controls: ICRG composite, private credit/GDP, creditor rights index.

### V. Main empirical findings — aggregate and country-group differences
- Firm-level determinants (Table 2 and Table 3):
  - Leverage: positively and significantly related to firm size, tangibility, bond rating; negatively related to growth opportunities and profitability.
  - Debt maturity: positively related to leverage, size, asset maturity, tangibility, profitability, bond rating and ADRs; negatively related to volatility.
- Impact of financial openness and domestic reforms:
  - Advanced economies:
    - Financial openness associated with increased leverage and longer debt maturity.
    - Domestic financial reforms associated with higher leverage and longer debt maturity.
  - Emerging economies:
    - Financial openness associated with increased leverage but with a shortening of debt maturity.
    - Domestic financial reforms associated with lower leverage; overall DFL index has no significant effect on debt maturity.
- Numeric coefficient examples (as reported):
  - Financial openness coefficient on leverage (All sample): 0.016 (p-value denoted b significant at 5% in table labels); Advanced = 0.007; Emerging = 0.146.
  - Financial openness coefficient on debt maturity (All sample): 0.062 (a); Advanced = 0.059 (a); Emerging = -0.206 (a).
  - Financial liberalization index on leverage (All sample): -0.096 (a); Advanced = 0.115 (c); Emerging = -0.059 (a).
  - Financial liberalization index on debt maturity (All sample): 0.121 (b); Advanced = 0.240 (b); Emerging = -0.024 (insignificant).

### VI. Disaggregated effects of reform components
- DFL components: credit controls and reserve requirements; interest rate controls; bank entry barriers; bank privatization; securities markets development; bank supervision.
- Reported component impacts:
  - Advanced countries:
    - Bank entry: positive effect on leverage.
    - Credit allocation: positive effect on leverage.
    - Interest rates: negative effect on leverage; positive effect on debt maturity.
    - Supervision: negative effect on leverage; positive effect on debt maturity.
    - Bank privatization: positive effect on leverage and positive on maturity.
  - Emerging economies:
    - Bank entry: negative effect on leverage; reduces debt maturity for constrained firms.
    - Interest rates liberalization: negative effect on leverage.
    - Securities markets development: negative effect on leverage; securities markets reforms increase debt maturity.
    - Supervision: negative effect on leverage.
    - Bank privatization: positive effect on leverage but mixed effects on maturity (positive in advanced, negative in emerging).
- Interpretation offered:
  - In emerging economies, many reforms appear to have increased the cost or reduced the availability of corporate debt relative to other finance, possibly because informational frictions, governance weaknesses, and underdeveloped financial infrastructure limit firms’ ability to convert reforms into greater long-maturity debt.

### VII. Financial constraints — heterogeneous firm responses
- Definition and sample split:
  - A firm-year is classified as constrained if the firm is not paying dividends and Tobin’s Q is either greater than 1 or greater than the country median.
  - Constrained observations: 15,808 total (14,120 advanced; 1,688 emerging).
  - Unconstrained observations: 55,607 total (47,277 advanced; 8,330 emerging).
  - Overall constrained share: 22 percent of sample observations.
- Heterogeneous results:
  - Advanced economies:
    - Positive effects of openness and reforms on leverage are stronger for constrained firms.
    - Openness increases debt maturity mainly for unconstrained firms; reforms’ effect on maturity more pronounced for constrained firms.
  - Emerging economies:
    - Positive effect of openness on leverage is stronger for unconstrained firms.
    - Bank privatization lowers leverage in constrained firms but increases it in unconstrained firms.
    - Bank entry deregulation and privatization reduce debt maturity more sharply for constrained firms.

### VIII. Robustness checks
- Alternative specifications:
  - Firm fixed effects instead of country and industry fixed effects: signs and significance remain unchanged.
  - Additional country-level controls: ICRG composite index, private credit/GDP, creditor rights index; results largely in line with main findings.
  - Interactions of openness and reforms with ADR and bond-rating dummies: little evidence of differential effects except that rated firms in advanced economies with greater openness have longer maturity.
  - Slope of the yield curve (10-year vs 2-year swap spread): increases debt maturity but does not affect leverage.
- Fit:
  - Debt maturity regressions report R-square around 0.296 (All sample, Table 3, specification 1) and similar values across robustness checks.

### IX. Interpretation and policy implications
- Interpretation:
  - Financial openness generally increases corporate leverage by expanding availability and lowering cost of debt; its effect on maturity depends on country financial infrastructure.
  - In advanced economies, openness and domestic deregulation deepen credit and lengthen maturity; in emerging economies, openness increases leverage but shifts debt toward shorter maturities.
  - Domestic reforms in emerging economies often reduce leverage (except bank privatization) and, depending on the component, have mixed effects on maturity — reflecting transitional frictions, broken relationships, and reliance on short-term monitoring finance.
- Policy implications:
  - Reforms should progress beyond deregulation to address underlying institutional weaknesses: improve law and contract enforcement, clarify property rights, strengthen accounting standards, and enhance corporate governance and creditor protection.
  - The "task of the next generation of reforms" is to improve the underlying institutional environment so that openness and deregulation translate into greater availability of long-term finance.

*Source: IMF working paper content unit _wp07186 - References, selected sections from the PDF chapter (1994–2002 firm-level analysis).*

### References .............................................................................................................

### _wp07186 - References .............................................................................................................

### I. Introduction — research question and scope
- Research question: How do domestic financial reforms and improved access to international markets affect corporate leverage and debt maturity?
- Sample and period:
  - Publicly traded non-financial firms in 38 countries over the period 1994–2002.
  - Overall sample: 76,147 firm-year observations; 65,565 from advanced countries and 10,582 from emerging market countries.
  - Country composition: 22 advanced and 16 emerging market countries.
- Key measures:
  - Leverage = total debt / total assets.
  - Debt maturity = long-term debt / total debt.
  - Domestic financial reforms measured by Abiad, Detragiache and Tressel (2007) index (DFL) and six component indices; range between zero and one.
  - Financial openness proxied by the ratio of total private sector external liabilities to GDP (de facto international financial integration).

### III. Data and descriptive statistics
- Firm-level summary (Panel A, Table 1):
  - Mean leverage: emerging economies mean 0.31; advanced countries mean 0.26.
  - Mean debt maturity: emerging economies mean 42 percent; advanced countries mean 55 percent.
  - Sample winsorized at the 0.5 and 99.5 percentiles; financial firms (SIC 60–69) and utilities (SIC 40–49) excluded; firms required at least two years of data.
- Time series patterns (Panel B, Table 1 / Figure 1):
  - Financial openness and the DFL index increased over the sample period and are "about constant after 2000."
  - Example year values (selected):
    - Leverage (All sample): 1994 = 0.242; 2002 = 0.265.
    - Debt maturity (All sample): 1994 = 0.590; 2002 = 0.500.
    - Financial openness (All sample): 1994 = 0.464; 2002 = 0.783.
    - Financial liberalization index (All sample): 1994 = 0.792; 2002 = 0.860.

### IV. Methodology and controls
- Regression specifications (fixed effects framework):
  - Dependent variables: firm leverage (LEV) and debt maturity (MAT).
  - Main regressors: lagged DFL index (or components) and lagged financial openness (FOPEN), lagged firm controls and lagged country controls.
  - Fixed effects: industry (2-digit SIC), country, and time; standard errors clustered by country; alternative firm fixed effects estimates reported.
  - Lag structure: all independent variables are lagged by one period (consistent with financing decisions made at the beginning of the period).
- Firm-level controls include: Tobin’s Q (growth opportunities), log total assets (size), EBIT/total assets (profitability), tangibility (NPPE/total assets), asset maturity (Barclay-Marx-Smith style), stock return volatility; ADR and bond-rating dummies.
- Country-level controls include: GDP per capita (log PPP), GDP growth, GDP growth volatility (5-year sd), inflation (and high-inflation dummy), stock market share turnover, banking crisis dummy, and additional robustness controls (ICRG composite, private credit/GDP, creditor rights index).

### V. Main empirical findings — aggregate and country-group differences
- General firm-level relationships (Table 2 and Table 3):
  - Leverage positively and significantly related to firm size, tangibility, bond rating; negatively related to growth opportunities and profitability.
  - Debt maturity positively related to leverage, size, asset maturity, tangibility, profitability, bond rating and ADRs; negatively related to volatility.
- Impact of financial openness and domestic reforms (summary):
  - Advanced economies:
    - Financial openness associated with increased leverage and longer debt maturity.
    - Domestic financial reforms associated with higher leverage and longer debt maturity.
  - Emerging economies:
    - Financial openness associated with increased leverage but with a shortening of debt maturity.
    - Domestic financial reforms associated with lower leverage; overall DFL index has no significant effect on debt maturity.
- Numeric examples (Table 2 and Table 3 coefficients; significance as reported):
  - Financial openness coefficient on leverage (All sample): 0.016 (p-value denoted b significant at 5% in table labels); Advanced = 0.007; Emerging = 0.146.
  - Financial openness coefficient on debt maturity (All sample): 0.062 (a); Advanced = 0.059 (a); Emerging = -0.206 (a).
  - Financial liberalization index on leverage (All sample): -0.096 (a); Advanced = 0.115 (c); Emerging = -0.059 (a).
  - Financial liberalization index on debt maturity (All sample): 0.121 (b); Advanced = 0.240 (b); Emerging = -0.024 (insignificant).

### VI. Disaggregated effects of reform components
- Components of the DFL index (six dimensions): credit controls and reserve requirements; interest rate controls; bank entry barriers; bank privatization; securities markets development; bank supervision.
- Summary of component impacts (as reported in the paper table and text):
  - Advanced countries:
    - Bank entry: positive effect on leverage (reported as “Bank entry +”).
    - Credit allocation: positive effect on leverage.
    - Interest rates: negative effect on leverage; positive effect on debt maturity.
    - Supervision: negative effect on leverage; positive effect on debt maturity.
    - Bank privatization: positive effect on leverage and positive on maturity.
  - Emerging economies:
    - Bank entry: negative effect on leverage; reduces debt maturity for constrained firms.
    - Interest rates liberalization: negative effect on leverage.
    - Securities markets development: negative effect on leverage; securities markets reforms increase debt maturity.
    - Supervision: negative effect on leverage.
    - Bank privatization: positive effect on leverage but mixed effects on maturity (text reports bank privatization increases leverage in all countries; effects on maturity differ: positive in advanced, negative in emerging).
- Interpretation offered:
  - In emerging economies, many reforms appear to have increased the cost or reduced the availability of corporate debt relative to other finance, possibly because informational frictions, governance weaknesses, and underdeveloped financial infrastructure limit firms’ ability to convert reforms into greater long-maturity debt.

### VII. Financial constraints — heterogeneous firm responses
- Definition and sample split:
  - A firm-year is classified as constrained if the firm is not paying dividends and Tobin’s Q is either greater than 1 or greater than the country median.
  - Constrained observations: 15,808 total (14,120 advanced; 1,688 emerging).
  - Unconstrained observations: 55,607 total (47,277 advanced; 8,330 emerging).
  - Overall constrained share: 22 percent of sample observations.
- Key heterogeneous results:
  - Advanced economies:
    - Positive effects of openness and reforms on leverage are stronger for constrained firms — consistent with reduced financial constraints and financial deepening.
    - Openness tends to increase debt maturity mainly for unconstrained firms; reforms’ effect on maturity more pronounced for constrained firms.
  - Emerging economies:
    - Positive effect of openness on leverage is stronger for unconstrained firms — consistent with informational/governance barriers preventing constrained firms from benefiting.
    - Bank privatization lowers leverage in constrained firms but increases it in unconstrained firms.
    - Bank entry deregulation and privatization reduce debt maturity more sharply for constrained firms.

### VIII. Robustness checks
- Alternative specifications and controls:
  - Firm fixed effects instead of country and industry fixed effects: signs and significance remain unchanged.
  - Additional country-level controls introduced: ICRG composite index, private credit/GDP, creditor rights index; results largely in line with main findings.
  - Interactions of openness and reforms with ADR and bond-rating dummies: little evidence of differential effects except that rated firms in advanced economies with greater openness have longer maturity.
  - Slope of the yield curve (10-year vs 2-year swap spread): increases debt maturity but does not affect leverage; results comparable and available upon request.
- R-squared and fit:
  - Debt maturity regressions report R-square around 0.296 (All sample, Table 3, specification 1) and similar values across robustness checks.

### IX. Interpretation and policy implications
- Interpretation:
  - Financial openness generally increases corporate leverage by expanding availability and lowering cost of debt; its effect on maturity depends on country financial infrastructure.
  - In advanced economies, openness and domestic deregulation deepen credit and lengthen maturity; in emerging economies, openness increases leverage but shifts debt toward shorter maturities.
  - Domestic reforms in emerging economies often reduce leverage (except bank privatization) and, depending on the component, have mixed effects on maturity — reflecting transitional frictions, broken relationships, and reliance on short-term monitoring finance.
- Policy implication emphasized by the authors:
  - To allow firms in emerging markets to fully benefit from credit market deregulation and financial globalization, reforms should progress beyond deregulation to address underlying institutional weaknesses: improve law and contract enforcement, clarify property rights, strengthen accounting standards, and enhance corporate governance and creditor protection.
  - The "task of the next generation of reforms" is to improve the underlying institutional environment so that openness and deregulation translate into greater availability of long-term finance.

*Italic line: Source: IMF working paper content unit _wp07186 - References, selected sections from the PDF chapter (1994–2002 firm-level analysis).*

### References

### References

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*Content drawn from the PDF chapter "References" (_wp07186 - References).*

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