Debt structure and corporate performance in emerging markets

• Overall market assessment of bank debt financing is negative.
• However, fully bank-financed firms lose less of their market value.
• The relationship between bank debt levels and firm valuation is different for financially distressed firms.
• Higher levels of bank debt may be particularly valuable for enhancing performance of financially stable firms.

This paper examines the effects of public and bank debt financing on firm performance in emerging markets. Using data on 700 publicly traded firms from the BRIC countries, it is documented that bank debt may have a positive effect on firm profitability. While overall market assessment of bank debt financing is negative, it is found that fully bank-financed firms lose less of their market value. Main findings remain unchanged after addressing potential endogeneity issues by introducing a novel instrumental variable. Overall, the results suggest that higher levels of bank financing may have positive effects on firm profitability and market valuation.