Working Paper: NBER ID: w24184
Authors: Shangjin Wei; Jing Zhou
Abstract: This paper examines the role of public governance quality in determining the composition of a country’s external liabilities and the capital structure of firms. In our theory, better institutional quality tends to promote a higher share of foreign direct investment and equity investment in total foreign liabilities, and a higher share of long-term debt within the debt/loan category. Similar prediction holds for the capital structure of firms. We conduct extensive empirical investigation by exploring both firm level data and country level data and find supportive evidence for these predictions.
Keywords: public governance; capital structure; foreign direct investment; equity financing; long-term debt
JEL Codes: F3; G15; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Improvements in institutional quality (O17) | Reduction in expropriation risk for equity investors (H13) |
| Improvements in institutional quality (O17) | Enhanced protection of property rights for long-term debt holders (G33) |
| Higher institutional quality (L15) | Greater share of equity financing in total liabilities (G32) |
| Higher institutional quality (L15) | Higher share of long-term debt within total debt financing (G32) |
| Linguistic segregation (J15) | Lower quality governance (D73) |