Government Financing and Corporate Leverage: International Markets Evidence

The relationship between government financing and corporate financing decisions is a timely topic, as many governments around the World have been rapidly borrowing to cover their growing budget deficits. In such an environment of rapidly growing government debt, corporations get crowded out (Friedman, 1978). However, there is a significant gap in the literature on the interplay between government financing and corporate leverage in developing economies, a topic largely dominated by evidence from advanced markets. The three essays included in the dissertation constitute a sufficient scientific contribution to the knowledge and understanding of how government borrowing, war, and foreign aid influence corporate leverage decisions.
Contrary to the traditional notion that rising government debt necessarily crowds out corporate borrowing, the first essay utilizes a unique dataset compiled from 29 African countries over the period from 2000 to 2019, encompassing both public and private nonfinancial firms. My co-authors and I show that external government borrowing in African economies crowds in corporate debt. Therefore, the arm’s length principle facilitates improved corporate creditworthiness, enhanced market liquidity, and broader access to private capital—especially among foreign-listed firms.
The second essay of my dissertation examines the interconnection between armed conflicts, government borrowing, and corporate leverage using a dataset of 53,275 firms from 101 countries over three decades. In this essay, my co-authors and I show a dual dynamic of financial crowding-in and crowding-out. A significant contribution of this essay is the differentiation between Domestic Corporations (DCs) and Multinational Corporations (MNCs) worldwide. Multinational Corporations experience declines in leverage during conflicts due to their exposure to the challenges of managing cross-border operations. Domestic firms, however, show more resilience, particularly in sectors like mining and construction, where conflict-related opportunities may arise.
The third essay explores the effects of foreign aid on corporate financial decisions. While foreign aid inflows are generally associated with macroeconomic challenges such as Dutch disease, I show that their effects on firms are heterogeneous. Export-oriented firms tend to experience reduced leverage due to competitiveness losses, whereas foreign-listed firms and those with significant foreign currency-denominated debt benefit from balance sheet improvements and increased borrowing capacity.
Briefly, my dissertation addresses important research questions at the frontier of public finance, corporate finance and international business. It provides implications for policymakers seeking to balance government fiscal sustainability with private sector financing, and it offers researchers an empirically rich and theoretically grounded reference point for future study.