The impact of supply-side factors on corporate leverage

Abstract This paper studies publicly traded Spanish firms with the objective to determine whether credit conditions and access to fixed-income markets influence corporate leverage. The case of Spain has been selected because the intense restructuring of its banking sector and the subsequent credit crunch experienced by the country between 2009 and 2012 provide an ideal setting to test the impact of supply-side variables. Based on an 8-year panel dataset, a linear regression model is proposed and the problem of cross-sectional correlation is tackled by resorting to the methods developed by Beck and Katz (1995) and Driscoll and Kraay (1998), in addition to the traditional Rogers or clustered standard errors. According to our results, credit conditions and access to public debt markets turn out to be significant determinants of leverage after controlling for the usual demand factors. Furthermore the negative effect of tightening credit conditions on market leverage doubles in the case of firms without access to public debt markets.