The role of macroeconomic factors in the capital structure of European firms: How influential is bank debt?

Based on a partial target adjustment model and the trade-off theory, this paper investigates whether the influence of macroeconomic variables of monetary policy on corporate leverage is shaped by the nature of borrowing, and more specifically by the presence of bank debt. Given the importance of banking institutions as transmitters of monetary policy, we argue that this source of debt might play a critical role in capital structure behaviour. In addition, as banking relationships are more informative and flexible, bank debt is likely to soften the effects of the economic cycle. Using a sample of European countries from 2004 to 2015, our evidence reveals that bank debt modifies the impact which macroeconomic variables of monetary policy have on a firm’s leverage. By comparing crisis and non-crisis periods, our results also show a more stable influence of said variables over the business cycle on bank debt than on non-bank debt.