We study how the availability of domestic credit influences the contribution that financing activities make to a firm’s return on equity (ROE). Using a sample of 51,866 firms from 69 countries, we find that financing activities contribute more to a firm’s ROE in countries with higher domestic credit. The higher contribution of financing activities is not driven by firms taking greater leverage ...

Efficient market hypothesis predicts that capital markets are beset with cer-tain biases which result from wrong estimation, and negatively influence shareholders’ expectations for higher returns, which in turn affects invest-ment efficiency, financial constraints and corporate performance efficacy in competitive markets, and eventually mitigates firm value. The present study aims at examining ...

We show that the misalignment of incentives between firms and their creditors has a larger impact on corporate debt policy than most every previously identified empirical determinant (e.g., size, profitability, asset tangibility, market-to-book, etc.). Using a regression discontinuity design, we find that firms completely shut down their net debt issuing activity in response to debt covenant vi...