Monetary policy and regional availability of debt financing

• The regional availability of bond and bank financing induces debt inflexibility.
• Inflexibility limits the firm's ability to replace bank loans with corporate bonds.
• Inflexibility tilts the firm's financing towards equity and reduces investment.
• Inflexibility amplifies the impact of tight monetary policy.

The relative availability of bond and bank financing should affect the firm's external financing and investment decisions. We define a measure that proxies for the regional borrowing inflexibility to substitute between bank and bond financing: “debt inflexibility”. Debt inflexibility tilts the firm's financial structure towards equity and reduces investment. The impact is stronger during the period of tight monetary policy, particularly for smaller firms and firms without banking relationships. Debt inflexibility increases the sensitivity of cash holdings to cash flows, reduces the likelihood of dividend payment and makes the firm more likely to pay equity in mergers and acquisitions.