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Does firm efficiency matter for debt financing decisions? Evidence from the biggest manufacturing countries

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  • Tenkir Seifu Legesse
  • Haifeng Guo

Abstract

The paper examines the relationship between debt financing and firm efficiency and the moderating role of liquidity holding. We focus on countries that have strong manufacturing industries, specifically China, Germany, India and Japan. The study shows that the firms’ efficiency relates positively to short-term and negatively to long-term debt financing. We document that companies with high productivity are likely to generate high cash flows and have more short-term financing capacity. On the contrary, high efficiency reduces the long-term borrowing since the short-term and internal financing are substitute for the external long-term capital. Besides, the results indicate that high short-term solvency weakens the relationship between the firms’ efficiency and their long-term debt financing. Our paper suggests that a firm’s capital structure is affected by different factors including the firm’s efficiency. Therefore, in their debt financing decisions, managers should consider the firm’s productivity level among other factors.

Suggested Citation

  • Tenkir Seifu Legesse & Haifeng Guo, 2020. "Does firm efficiency matter for debt financing decisions? Evidence from the biggest manufacturing countries," Journal of Applied Economics, Taylor & Francis Journals, vol. 23(1), pages 106-128, January.
    • Handle: RePEc:taf:recsxx:v:23:y:2020:i:1:p:106-128
    DOI: 10.1080/15140326.2020.1711591
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    Cited by:

    1. Sadiq, Misbah & Yousaf, Sheikh Usman & Anser, Muhammad Khalid & Rashid Khan, Haroon ur & Sriyanto, Sriyanto & Zaman, Khalid & Van Tu, Duong & Anis, Siti Nisrin Mohd, 2023. "The role of debt financing in the relationship between capital structure, firm’s value, and macroeconomic factors: To throw caution to the wind," The Quarterly Review of Economics and Finance, Elsevier, vol. 87(C), pages 212-223.
    2. García, C. José & Herrero, Begoña, 2021. "Female directors, capital structure, and financial distress," Journal of Business Research, Elsevier, vol. 136(C), pages 592-601.

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