Do changes in bank lending impact corporate capital structure decisions? Traditionally capital structure research has centred on demand-side determinants of capital structure, implicitly assuming supply to be infinitely elastic. With traditional theories being unable to fully account for firm capital structure, recent research has begun to explore the other side of the capital structure puzzle.
This paper employs an Australian context in exploring the question of whether firms’ leverage decisions are impacted by banks’ lending habits. An Australian environment provides the ideal environment for addressing this question, due to its concentrated banking market, underdeveloped bond market, and the consequential reliance of firms upon only a few key banks for debt financing. Using the global financial crisis and changes in the Basel accord as exogenous shocks to bank lending, this thesis explores the implications of changes to bank lending on firm financing behaviour.
This thesis makes three key contributions to the literature on capital structure. Firstly, it informs future research, providing evidence that supply factors are important inputs into the capital structure decisions of Australian firms. Second, it confirms international findings, confirming that, even in the absence of a significant economic downturn, the global financial crisis had significant costs for Australian business due to a restricted credit environment. Finally, it informs regulatory decisions, suggesting that the capital adequacy requirements imposed on banks as a result of the Basel accord had incidental effects on firm financing behaviour.