An analysis of the debt specialization determinants in large European firms

Abstract

This study investigates the relationship between firm characteristics and debt specialization in large European firms. Through a quantitative dataset extracted from Capital IQ comprising of 284 companies between 2018 and 2023. The data analysis is performed using SPSS (Statistical Package for the Social Sciences) Program. the research finds that firm size has a positive impact on debt specialization, indicating that larger firms tend to concentrate their debt in fewer types. This aligns with the trade-off theory, which suggests that larger companies have better access to a variety of debt instruments, enabling greater specialization. On the other hand, profitability is negatively related to debt specialization. Firms with higher returns on assets tend to diversify their debt more, relying less on specialized forms and more on diversified debt portfolios. This result supports the pecking order theory, where profitable firms prefer internal financing over external debt. The study finds no significant impact of liquidity, measured by the quick ratio, on debt specialization. This challenges the signalling theory, which posits that firms use specialized debt structures to convey financial stability to creditors and investors. Lastly, growth opportunities, indicated by revenue growth, do not significantly affect debt specialization. This suggests that high-growth firms do not necessarily adopt more specialized debt structures, contrary to some theoretical expectations. Altogether, the findings provide a nuanced picture of the contributors influencing debt specialization in large European firms, highlighting the significant roles of company's scale and profitability while questioning the impacts of liquidity and growth opportunities. The study is closed off with the presentation of its limitation and future research opportunities that we suggested based on our findings.