Does firm efficiency matter for debt financing decisions? Evidence from the biggest manufacturing countries

The paper examines the relationship between debt financing and firm efficiency and the moderating role of liquidity holding. We focus on countries that have strong manufacturing industries, specifically China, Germany, India and Japan. The study shows that the firms’ efficiency relates positively to short-term and negatively to long-term debt financing. We document that companies with high productivity are likely to generate high cash flows and have more short-term financing capacity. On the contrary, high efficiency reduces the long-term borrowing since the short-term and internal financing are substitute for the external long-term capital. Besides, the results indicate that high short-term solvency weakens the relationship between the firms’ efficiency and their long-term debt financing. Our paper suggests that a firm’s capital structure is affected by different factors including the firm’s efficiency. Therefore, in their debt financing decisions, managers should consider the firm’s productivity level among other factors.