CORPORATE FINANCIAL STRUCTURE UNDER INFLATION AND FINANCIAL REPRESSION: A COMPARATIVE STUDY OF NORTH AMERICAN AND EMERGING MARKETS FIRMS

A. Sinan Cebenoyan, Klaus P. Fischer and George J. Papaioannou

Banks operating in less-developed countries with a strongly regulated environment frequently ration credit to their customers. In markets with controlled interest rates, when the inflation rate is high, real interest rates tend to be negative. This increase the incentive for banks to ration credit or lend predominately short term. The rationing, in turn, reflects upon the capital and debt maturity structure of firms. This study presents a model that explains the behavior of banks under conditions of inflation and financial repression. The paper also reports a test of the hypothesis that a simultaneous decrease in maturity structure and leverage follows expected increases in inflation as the theory suggests. The study uses data from two countries with a repressive financial environment (Greece and Turkey) and compares the results with those of countries where incentives for rationing are small or non-existent (U.S. and Canada). The statistical results tend to support the main hypothesis of the paper.