The effects of government borrowing on corporate financing: Evidence from Europe

- There is a robust negative relationship between government borrowing and corporate debt in developed European countries.
- We do not identify any significant relation between government debt and equity.
- Long-term debt of large credit-worthy companies is more sensitive to government debt in comparison to that of small financially constrained companies.

This study investigates the relationship between government borrowing and corporate financing decisions in 15 developed European countries for the period of 1989-2014. We find a robust negative relationship between government borrowing and corporate debt in developed European countries. However, we do not identify any significant relation between government debt and equity. The more important finding of our study is that long-term debt of large credit-worthy companies is more sensitive to government debt in comparison to that of small financially constrained companies. In addition to government borrowing, firm-specific factors and other macroeconomic control variables are statistically significant for corporate financing decisions.