State ownership and corporate leverage around the world
Political economy is an important source of distortions in financial markets. For example, state ownership may either lower capital costs due to implicit or explicit bailout guarantees or raise them due to the politicisation of business decisions. This column uses cross-country data on 4 million firms to show that state ownership is negatively correlated with leverage on average, and this effect is stronger in countries with weaker rule of law. The relationship is positive, however, for very large firms, suggesting that the perception of bailout guarantees may be strongest for ‘national champions’.