1725. Access to Long-Term Debt and Effects on Firms' Performance: Lessons from Ecuador

Fidel Jaramillo and Fabio Schiantarelli
(February 1997)

Does the availability of long-term financing affect a firm's productivity (by facilitating access to more productive technologies) and capital accumulation? Or does the less intense monitoring and the lesser fear of liquidation associated with long-term debt actually reduce productivity?

Recent theory increasingly emphasizes the association of short-term debt with higher-quality firms and better incentives. The possibility of premature liquidation, for example, may serve as a disciplinary device to improve firm performance. At the same time the role of long-term debt, especially when it is heavily subsidized, is being rethought because so many development banks are plagued with nonperforming loans and doubts about the selection criteria used in allocating funds.

Jaramillo and Schiantarelli explore empirical evidence about the structure of debt maturity in Ecuadorean firms. They discuss how it has been affected by government intervention in credit markets, and by financial liberalization. Using firm-level panel data, they investigate the determinants of access to long-term debt in Ecuador. Finally, they provide evidence about how the maturity structure of debt affects firms' performance, particularly productivity and capital accumulation. They find that:

• Long-term debt is very unevenly distributed. Almost 30 percent of firms never have access to it during the period studied.

• Large firms are more likely to have access to long term debt than small firms. The former are on average more profitable.

• Conditional on size, operating profits do not increase the probability of receiving long-term credit and may actually decrease it. This suggests that the mechanism used to allocate long-term resources in Ecuador may be flawed.

• The allocation problem was worse for directed credit. There is some evidenct that, after financial liberalization, the problem was less severe.

• There is a strong positive association between asset maturity and debt maturity, a matching of assets and liabilities.

• Shorter-term loans are not conducive to greater productivity while long-term loans may lead to improvements in productivity.

• While long-term loans may positively affect the quality of capital accumulation, they do not have an impact on the amount of fixed investment.

This paper — a product of the Finance and Private Sector Development Division, Policy Research Department — was prepared for the conference "Firm Finance: Theory and Evidence" held on June 14, 1996. The study was funded by the Bank's Research Support Budget under research project "Term Finance" (RPO 679-62). Copies of this paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Bill Moore, room N9-038, telephone 202-473-8526, fax 202-522-1155, Internet address gmoore@worldbank.org. (37 pages)

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