Government Debt and Corporate Capital Structure: Testing of the Financial Crowding Out Effect Hypothesis

This paper examines the relationship between government debt and corporate capital structures (financing choices) for firms listed in Tehran stock market, during 1390-98. The results show that the there is a negative and significant relationship between government debt and corporate capital structure (financial leverage), although the estimated coefficient is relatively small. In other words, we can conclude that the financial crowding out effect is confirmed in Iranian companies. Also, the results show that corporate with larger size and more profitable are more likely to react to changes in government debt. In other words, if corporates have larger size and more profitability, then the financial crowding out effect is greater. Hence, the key conclusion is corporate managers should prioritize revenue diversification and profitability strategies in the reaction to government debt policies.