Working Paper Series no. 880: The Financing Structure of Non-Financial Corporations and Macro-Financial Implications in France

This paper aims at shedding light on the relationship between firms' indebtedness, the corporate funding mix, financing costs and NFC investment. While we focus on the case of France, our results may hold more generally for many developed economies with equally evolved banking systems and financial markets. First, we seek to identify the determinants of the financing structure of NFCs and its impact on the cost of capital that ultimately drives NFC investment activity. To this end, we first develop a partial equilibrium framework capturing NFC financing decisions, which we match to the particular conditions and empirical relationships observed in France. Second, this work aims at discussing external financing decisions faced by NFCs through the lens of an integrated macro model as commonly used for forecasting and policy analysis. Thus, we integrate our derived NFC financing block into the Banque de France's semi-structural macroeconomic model FR-BDF and use the general equilibrium framework for several macro-financial scenario analyses.

Our comprehensive model of the aggregate NFC balance sheet enables us to derive an NFC leverage variable summarizing the degree of corporate financial vulnerability. In turn, the leverage position of NFCs determines risk premia and bank loan and bond spreads, taking financial accelerator efiects into account. Thus, augmenting the FR-BDF macroeconomic forecasting model with our NFC financing block provides a better understanding of the dynamics of corporate debt and enriches the description of the NFC balance sheet and macro-financial linkages as a function of shocks on long-term rates, spreads, and NFC investment. Our model can therefore be used both for forecasting purposes and in macro-financial scenario and financial stability analyses.

Our empirical results show first that NFCs rely on bank lending to cover a large share of their new financing needs, which is sensitive to bank lending rate conditions. Second, the trade-off between bank loans and bond issuance is determined by the relative cost of these two debt instruments. Finally, shocks that move equity markets affect, through equity revaluations, the market leverage of firms, which in turn translates into adjustments of debt-related risk premia. While integrating our NFC financing block does not fundamentally change the macroeconomic properties of the FR-BDF model, we find that the resulting financial accelerator mechanism significantly modifies the response of firms' investment to changes in financing conditions. The augmented model is therefore able to capture and identify macro-financial linkages, a feature particularly useful to describe times of tensions in debt markets or risks related to excessive corporate indebtedness.

Moreover, we employ the model to simulate the response of corporate funding mix and investment to a wide range of macro-financial stress and macroprudential policy scenarios. Overall, we find a dampening efiect of an exogenous increase in bank credit and leverage on economic activity, with a particular role for firms' assets valuation on their financing conditions. Beyond forecasting, the augmented FR-BDF model can therefore contribute to the evaluation of risks related to corporate indebtedness and to financial stability analyses.