Introduction

The state of corporate indebtedness has always attracted considerable attention in both academic and policy circles. More recently the rise in companies' debt has been at the centre of a lively debate in the United States (Volcker, 1986; Kaufman, 1986; Bernanke and Campbell, 1988).

In Italy the evolution of corporate debt has witnessed a dramatic turnabout from the situation in the 1970s, where increasing companies' debt was at the forefront of policy makers' concern, to the more recent trend, characterised by a marked improvement in the main debt indicators. The purpose of this chapter is to provide a detailed account of the determinants of corporate debt choice for Italian firms.

This chapter is organised as follows. In Section 2 we present a brief account of the evolution of corporate financing decisions in Italy. We find that there are significant differences between large companies on the one hand and small and medium-sized firms on the other. We choose therefore to rely on two different samples of balance sheet data, one of small and medium-sized manufacturing firms from the Centrale dei Bilanci (hereafter CdB) data base and the second one of large firms from Ricerche & Studi (hereafter R & S). After a brief survey of the theoretical models of corporate borrowing (Section 3), we present in Section 4 our econometric results. We find a substantial role for cash flow considerations and for fiscal effects.