A Longitudinal Study of Borrowing by Large American Corporations

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Abstract
Using models drawn from organizational theory and institutional economics, this paper examines the extent to which firms borrow money. We argue that corporate borrowing depends on four factors: the expected return on borrowing, the availability of internal funds, the strategic orientation of the chief executive officer, and the firm's board composition. We formulate four hypotheses, which we test with data on 22 large U.S. manufacturing firms from 1956 through 1983. Retained earnings, the expected return on borrowing, the presence of a representative of a financial institution on the firm's board of directors, and the presence of a CEO from a finance background are all associated with the level of borrowing. The findings suggest that both economic and organizational factors affect the extent to which firms borrow.