Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/180373 
Year of Publication: 
2018
Series/Report no.: 
EIB Working Papers No. 2018/03
Publisher: 
European Investment Bank (EIB), Luxembourg
Abstract: 
Why don't non-financial companies in Europe issue more equity? Using experimental data on firms from Europe, this paper analyses how firms trade-off between debt and external equity financing. It finds that firms are willing to pay a substantial premium on debt when presented with an equity participation as an alternative. Companies are willing to pay an interest rate that is about 8.8pp higher than the cost of equity to obtain a loan instead of external equity. This preference for debt can be explained only partially by the more favourable tax treatment of debt, fear of loss of corporate control and positive growth expectations. This paper discusses what else may explain this striking aspect of firm behaviour in the EU.
Subjects: 
capital structure choice
debt premium
behavioural finance
JEL: 
D22
G31
G32
G34
G40
Persistent Identifier of the first edition: 
ISBN: 
978-92-861-3623-8
Document Type: 
Working Paper

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