Working Paper: NBER ID: w16445
Authors: Joseph P. H. Fan; Sheridan Titman; Garry Twite
Abstract: This study examines the influence of institutional environment on capital structure and debt maturity choices by examining a cross-section of firms in 39 developed and developing countries. We find that a country's legal and tax system, the level of corruption and the preferences of capital suppliers explain a significant portion of the variation in leverage and debt maturity ratios. Our evidence indicate that firms in countries that are viewed as more corrupt tend to use less equity and more debt, especially short-term debt, while firms operating within legal systems that provide better protection for financial claimants tend to have capital structures with more equity, and relatively more long-term debt. In addition, the existence of an explicit bankruptcy code and/or deposit insurance is associated with higher leverage and more long-term debt. We also find that firms tend to use more debt in countries where there is a greater tax gain from leverage, while firms in countries with larger government bond markets have lower leverage, suggesting that government bonds tend to crowd out corporate debt. Countries with more extensive defined benefit pension funds have higher debt ratios and longer debt maturities, whereas those with more extensive defined contribution fund activities have lower debt ratios. In addition, debt ratios are lower in countries that limit the bond holdings of pension funds. Finally, we do not find a significant association between financing choices and the size of the insurance industry.
Keywords: capital structure; debt maturity; institutional environment; corruption; legal systems
JEL Codes: G3; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| corruption (D73) | lower equity (G32) |
| corruption (D73) | higher short-term debt usage (G32) |
| stronger legal protections (P14) | more equity (D63) |
| stronger legal protections (P14) | longer-term debt (H63) |
| explicit bankruptcy code (G33) | higher leverage (G32) |
| explicit bankruptcy code (G33) | longer debt maturities (F34) |
| tax incentives for debt (H63) | increased leverage (G32) |