Corporate indebtedness has risen sharply in the wake of the global financial crisis as low interest rates enticed many firms to issue bonds and borrow from banks. This debt surge occurred in developed countries and emerging markets alike. As a result, the total debt of non-financial companies increased from 84 percent of global GDP in 2009 to 92 percent in 2019. The recent COVID-19 pandemic has pushed up debt levels even further, creating fears of a corporate debt bubble that could threaten the health of the global economy.
The past decade has also been characterized by a steady rise in state ownership of corporate equity. Many governments not only nationalized banks during the global financial crisis, but also took stakes in non-financial corporations. The increasing popularity of Chinese-style state capitalism further contributed to this resurgence in state ownership (Megginson, 2018) as did the COVID-19 pandemic, which led many governments to take equity stakes in financially distressed companies.
The parallel increase in state ownership and corporate leverage around the world raises the question: To what extent can the latter increase be explained by the former? In a recent paper, we use a comprehensive global database on corporate leverage – defined as a firm’s total debt normalized by total assets – to help answer this question.
How Can State Ownership Affect Corporate Leverage?
Before we turn to our empirical findings, it is useful to recap how state ownership may affect corporate borrowing and therefore leverage. Broadly speaking, two countervailing forces determine the direction of this influence. First, state ownership can benefit firms because it implicitly guarantees that debt will be repaid. This lowers borrowing costs and may therefore increase leverage.
Second, state ownership may increase the cost of debt if the state’s non-financial objectives clash with those of for-profit lenders. For example, state ownership can entail outright political interference, increased risk taking, or weaker financial discipline. This would give rise to a negative relationship between state ownership and corporate leverage.
To determine which of these effects dominates, we use an exhaustive firm-level data set. We start by splicing multiple historical editions of Bureau van Dijk’s Orbis database. This allows us to carefully track the ownership structure of individual companies over time and to identify the shares of all shareholders classified as public authorities or the state. We then create continuous measures of state ownership as well as variables that indicate whether the state owns more than 20, 50, or 99 percent of a firm’s equity, either directly or indirectly. Our final data set spans 89 countries over 20 years (2000–2019) and contains 20 million annual observations on almost 4 million firms. The comprehensive nature of our data allows us to explore heterogeneity in the relationship between state ownership and corporate leverage across several important firm- and country-specific dimensions.
What We Find
We first conduct a cross-sectional analysis to uncover key patterns and stylized facts about state ownership and firm leverage. Throughout this analysis, we control for standard (time-varying) determinants of firm leverage as suggested by corporate finance theory: firm size; profitability; asset tangibility; and the size of the non-debt tax shield. Importantly, we also control for country-sector-year fixed effects in all regressions, thus comparing firms with different levels of state ownership in the same country, sector, and year.
The first key result is that state ownership, both at the extensive and the intensive margin, is robustly and negatively related to firm leverage. This implies that, on average, the abovementioned negative impact of state ownership more than offsets any benefits firms may derive (in terms of borrowing capacity) from the state as a shareholder. The magnitude of the effect is substantial: Within the same country-sector-year, firms with any state ownership on average have a 5-percentage point lower debt/assets ratio. This is about one-quarter of the median leverage of 18.6 percent in our global sample.
Our second main result is that the negative relationship between state ownership and corporate leverage holds across most of the firm-size distribution – with the important exception of the very largest firms. We find that only in the top percentiles of the firm-size distribution – that is, firms owning more than approximately USD 3 billion of assets – state ownership is associated with higher corporate leverage. In other words, only the largest firms in a country benefit from (partial) state ownership through implicit bailout guarantees and cheaper credit. This finding is corroborated by analogous results for corporate borrowing costs: For smaller firms, state ownership is associated with more expensive debt, whereas for larger ones, the relationship has the opposite sign.
Third, we find that the negative relationship between state ownership and corporate leverage is considerably weaker in richer countries with stronger rule of law, better control of corruption, stronger insolvency rights, and better investor protection. This indicates that in better institutional environments, private creditors worry less about distortions due to state interference so that the negative impact of state ownership on firm leverage is smaller.
Fourth, we show that the relationship between state ownership and corporate leverage depends critically on the structure of the banking system, in particular the presence of foreign and state banks (relative to domestic private banks). We find that (smaller) state-owned firms are even less levered, relative to privately owned ones, in countries where foreign banks play a bigger role. This indicates that foreign bank ownership imposes financial discipline and reduces the likelihood of the state channelling credit to state-owned enterprises. In line with this interpretation, we find that state-owned firms, especially smaller ones, pay higher interest rates relative to equivalent privately owned firms in countries where foreign banks play a bigger role.
Our results on state banks are more nuanced. While on average, a larger presence of state banks is associated with a stronger negative relationship between state ownership and firm leverage, this effect is reversed for larger companies. This suggests that countries use state banks to allocate credit to favoured “national champions.”
Finally, we complement our cross-firm results with a within-firm analysis based on panel data on privatized firms, as well as with results based on a matching estimator that systematically compares privatized firms with observationally similar (non-privatized) state-owned enterprises. Both exercises yield empirical results that are very similar to those from the cross-firm analysis, both qualitatively and quantitatively. We again find that firms typically increase their leverage by about 5 percentage points in the five years after privatization and relative to comparable (matched) non-privatized firms.
The event-study plot in Figure 1 depicts these results. It also shows one important nuance: While the main increase in leverage takes place in the year of privatization (and the year after), there is also a clear (albeit not as steep) increase in leverage just beforehand. In the two years before privatization, firm leverage already rises by about 2 percentage points. As the preparation of privatization deals usually takes several years, this likely reflects creditors’ ex ante expectations of improved governance after privatization.
Figure 1: Privatization and Firm Leverage: Event study
In terms of its coverage of firms of very different sizes and of countries with very different institutional environments, the comprehensive nature of our data allows us to generate several new insights into how state ownership impacts firms’ financial policies. In particular, we show that the relationship between state ownership and leverage is heterogeneous across firm sizes. While there is no robust impact of state ownership on leverage for large firms in our sample, we find a strong negative effect of state ownership on leverage among micro, small and medium-sized firms. This effect is increasing in the degree of state ownership but is significant even if the state only has a small ownership stake. Moreover, we find similar effects on firms’ costs of debt: While state ownership increases these costs for smaller state firms, it actually reduces external funding costs for large and very large state-owned enterprises.
In addition to comparing state and private firms within the same countries, sectors and years, we also analyze the effect of state ownership on leverage within the same firms. We study the evolution of leverage in firms that underwent privatization and find that privatization allows firms to lever up. Similar to our findings from the cross-firm analysis, this effect is again driven by micro, small and medium-sized firms. The magnitude of the effect is also very similar: about 5 percentage points.
The strong negative relationship between state ownership and corporate leverage likely reflects the corporate governance risks of state ownership. Creditors may fear the state’s intervention in firms’ operations, and they may therefore be less willing to lend to such firms. Indeed, we find the negative effects of state ownership on leverage are much stronger in countries with a weaker rule of law, control of corruption, protection of investors, and insolvency procedures. These results are consistent with the view that state ownership is especially costly in countries with weaker political and legal institutions.
Our results can also be seen in light of a recent literature that underlines the substantial misallocation of capital and labour across firms – even within narrowly defined industrial sectors and within the same country. State ownership can be an important source of such allocative inefficiency and the resulting drag on total factor productivity. Our results highlight one mechanism through which state ownership can introduce distortions and resource misallocation: It interferes with the ability of all but the largest firms to access credit.
Ralph De Haas is the Director of Research at the European Bank for Reconstruction and Development, a part-time Professor of Finance at KU Leuven, and a CEPR Research Fellow.
Sergei Guriev is a Professor of Economics and the Scientific Director of the Master and PhD programmes in Economics at Sciences Po as well as a CEPR Research Fellow.
Alexander Stepanov is an Associate Economist at the EBRD.
This blog is adapted from their paper, “State Ownership and Corporate Leverage Around the World,” available on SSRN.
The views expressed in this post are those of the authors and do not represent the views of the Global Financial Markets Center or Duke Law.
 Institute of International Finance (IIF), 2020. Global Debt Monitor: COVID-19 Lights a Fuse, 7 April, Washington, D.C.
EBRD, 2020. Transition Report 2020-21. The State Strikes Back, European Bank for Reconstruction and Development, London; Megginson, W.L., 2018. “Privatization, State Capitalism, and State Ownership of Business in the 21st Century,” Foundations and Trends in Finance, 11(1-2), Now Publishers.
 De Haas, R., S. Guriev, and A. Stepanov (2022), State Ownership and Corporate Leverage around the World, CEPR Discussion Paper No. 17300, Centre for Economic Policy Research, London.
 This figure provides a graphic representation of an average treatment on the treated (ATT) analysis. The dots correspond to annual ATT estimates including a bias-adjustment term. The whiskers represent 95 percent confidence intervals.