In the aftermath of the Global Financial Crisis, there were heightened concerns that a reduced availability of long-term finance and the resulting rollover risks would adversely affect the performance of small and medium-sized firms and hamper large fixed investments. Policy makers argued that, as a result, developing countries’ ability to sustain rates of economic growth sufficiently high to reduce poverty and ensure shared prosperity would be diminished. Recently, as corporates of emerging markets have benefited from favorable global liquidity conditions to issue long-term bonds, policy discussions focused on the stability risks of high leverage that could materialize when monetary conditions normalize.

What does the evidence on capital structures tell us? In a new paper prepared for the Global Financial Development Report 2015/2016 on Long-Term Finance, Asli Demirguc-Kunt, Maria-Soledad Martinez-Peria and I study how the Global Financial Crisis impacted the capital structure of firms, focusing in particular on privately held firms and on small and medium sized enterprises (SMEs). We rely on a large dataset of about 277,000 firms from 79 countries, covering the period 2004-2011. The data are collected from Bureau Van Dijk in the ORBIS database.

According to theory, leverage and debt maturity are expected to decline during a crisis because firms and providers of finance adjust to higher uncertainty, higher risks, and lower returns by stepping up risk and term premia (in some cases, suppliers of finance simply cut access to term finance) and because banks restore or protect their soundness partly by tightening lending standards. The resulting decline in the use of long-term finance may not be optimal though, because reduced use of long-term finance can result in a decline in profitable fixed investments and can lower productivity growth.

The authors find