Country Governance Structure and Financial Development as Determinants of Firms’ Capital Structure

Journal of Money, Investment and Banking, Issue 26, 2012

19 Pages Posted: 15 Nov 2013

See all articles by Guilherme Kirch

Guilherme Kirch

Universidade Federal do Rio Grande do Sul (UFRGS)

Cesario Mateus

Aalborg University

Paulo R. S. Terra

FGV-EAESP

Date Written: 2012

Abstract

This paper investigates the determinants of capital structure for a sample of 13,070 small medium sized enterprises (SMEs) and 67,449 firm-year observations from Eastern European countries over the period 1994-2004. The use of a sample of SMEs in our analysis rather than large listed firms provide an effective way to test whether country specific factors are important drivers of firm’s capital structure, since SMEs do not have access to international capital markets, being less likely to be influenced by international standards.

We employ usual firm-specific financial variables and country-specific factors that describe the degree of governance structure and financial development of each country. Factor analysis on both the governance structure and financial development indicators adopting the Principal Component Analysis is used to avoid the problems of multicolinearity. Our results indicate that firm ownership concentration and country governance structure are insignificant explanatory variables to the degree of leverage of the firs in our sample. On the other hand, indicators of country financial development are robust determinants of capital structure. However, the marginal explanatory power of country-specific variables is small. We conclude that firm-specific characteristics are decisive in capital structure.

Keywords: Capital Structure, Ownership Structure, Country Governance, Financial Development

JEL Classification: G32, F30, O52

Suggested Citation

Kirch, Guilherme and Mateus, Cesario and Terra, Paulo Renato Soares, Country Governance Structure and Financial Development as Determinants of Firms’ Capital Structure (2012). Journal of Money, Investment and Banking, Issue 26, 2012, Available at SSRN: https://ssrn.com/abstract=2353663

Guilherme Kirch

Universidade Federal do Rio Grande do Sul (UFRGS) ( email )

Rua Washington Luiz, 855
Porto Alegre, RS, 90010-460
Brazil
+55 51 33083836 (Phone)

HOME PAGE: http://www.ea.ufrgs.br

Cesario Mateus (Contact Author)

Aalborg University

Fredrik Bajers Vej 7E
Aalborg, DK-9220
Denmark

Paulo Renato Soares Terra

FGV-EAESP ( email )

Rua Itapeva 474 - 8o andar
Bairro Bela Vista
São Paulo, 01332-000
Brazil
11-3799-7899 (Phone)

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