Bank debt and performance of Continental European firms

Abstract

When the source of external capital for Continental European firms is examined, debt markets have historically supplied a much larger percentage of the external capital than equity markets, and firms rely much more on bank debt than bonds for their external funds. In this environment banks have incentives to either monitor or actually manage firms depending on their relative debt stake in those firms. The objective of this paper is to assess the association between firm performance and level bank debt for firms from seven Continental European countries. After controlling for firm- and country-specific characteristics, we find bank debt is correlated with a firm's accounting performance as measured by return on assets (ROA) and return on shareholders' funds. When repeating the analysis on a country-by-country basis, an association is found between bank debt and ROA.

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