Capital Structure of Borrowers and Lenders: An Empirical Analysis

This paper analyses the effect of the capital structure of lenders on the capital structure of their borrowers. We provide new evidence on the capital structure determinants of non-financial firms and contribute to the discussion on the effect of the financial sector on the real economy. Using syndicated loan contracts, we identify the most important lenders for each borrower and construct a proxy for the borrower’s banking network. Keeping the effect of size, tangibility, market to book, profitability, and risk fixed, we find that a 1 percentage point increase in the average of lenders’ leverage leads to an increase of 12 basis points in borrowers’ leverage. The positive effect of lenders’ leverage on the leverage of their borrowers implies that further deleveraging of the financial sector may lead to less indebtedness and vulnerability of the real economy. We also find evidence that macroeconomic variables, such as GDP growth and inter-bank short-term interest rates, have explanatory power for the leverage of non-financial companies. JEL classification: G21, G32, G38