, Volume 7, Issue 1, pp 95-118
Date: 12 Feb 2010

Corporate debt and financial balance sheet adjustment: a comparison of the United States, the United Kingdom, France and Germany

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Abstract

The level of UK corporate debt directly affects financial stability in the United Kingdom because a significant amount of the exposure of the UK financial system is to UK corporates. Our paper provides a comparison of the determinants of corporate debt in the United States, the United Kingdom, France and Germany. The comparison serves to benchmark our findings about the determinants of UK corporate debt. In addition, the UK financial sector is significantly exposed to the corporate sectors in the United States, Germany and France. The model assesses the contribution of investment, acquisitions, cash flows and market-to-book values to the determination of debt, and also the tendency of debt to revert to its optimum level. Debt was found to be positively related to the financing needs of the firm, and the optimum level of debt to be negatively related to the market-to-book ratio. This casts some light on the procyclicality of debt.

The views expressed in this paper are those of the authors, and not necessarily those of the Bank of England. This paper was completed while P. Gibbard was at the Bank of England.