Does Government Borrowing Effect Corporate Financing? Evidences from Banking Sector of South Asian Countries

Abstract

The relation between government borrowing and capital structure is very crucial, if the government borrows to invest in improving infrastructure, it may be able to overcome market failure and improve the productive capacity of the economy. However, if the government borrows and misspends the money or spends it on transfer payment, there may be a very limited increase in productive capacity. The main objectives of this study are to analyze the practices of corporate financing, government borrowing, liquidity, profitability, tangibility, firm size, inflation, market return, interest rate and GDP in South Asian countries and to determine the impact of government borrowing, liquidity, profitability, tangibility, firm size, inflation, market return, interest rate and GDP on corporate financing. The population of this study was banking sector of the South Asian (Pakistan, India, Bangladesh and Sri Lanka). The time span of 10 years ranging from 2008 to 2017 was taken for this study. The secondary data pertaining to the entire variables used was taken from Federal Bureau of Statistics, Annual Reports of selected banks and World Bank Indicator. This study was primarily based on secondary data and quantitative analysis. The basic techniques used in the study were Descriptive Analysis, Correlation Analysis, Regression Analysis, Panel Data, Fixed and Random Effect. Findings of this study tell that most of the countries show an insignificant impact of government borrowing on corporate financing, which contradicts with the literature. Moreover, significant impact of profitability on leverage is also observed in many countries. In the same manner, liquidity and inflation also have shown insignificant impact on leverage. Whereas, overall Asia results for this study show insignificant impact of government borrowing on corporate financing.