Capital Market Access and Financing of Private Firms


  • *We thank Sudipto Dasgupta and Murray Frank for many helpful comments and discussions. Vidhan Goyal thanks the Research Grants Council of the Hong Kong Special Administrative Region for financial support (Project No. 641608).

Vidhan K. Goyal
Department of Finance
Hong Kong University of Science and Technology
Hong Kong


How does capital market access affect the capital structure decisions of firms? To examine this question, we compare the financing decisions of a large sample of private and public companies from 18 different European countries. We find significant differences in the leverage policies of private and public firms. Private firms have much higher leverage ratios than public firms. In particular, the leverage of private firms is more negatively related to past profitability, consistent with their less active adjustment. Other evidence corroborates sluggish adjustment and suggests that private firms face significantly higher cost of accessing external capital markets. When we compare private and public firms in countries that differ on creditor rights and contract enforceability, we find more pronounced differences in the leverage policies of private and public firms in countries that are strong on legal rights and their enforcement. In countries with weak rights and poor enforcement, the financing policies of public firms begin to resemble those of private firms.