Financial Decisions and Investment Outcomes in Developing Countries: The Role of Institutions

42 Pages Posted: 26 Mar 2015

See all articles by Rima Turk-Ariss

Rima Turk-Ariss

International Monetary Fund; Economic Research Forum

Date Written: February 2015


This paper analyzes how differences in legal origin, judicial efficiency, and investor protection affect firm leverage and earnings volatility across developing countries. Using a large number of developing countries, four main findings are highlighted. First, firms in civil legal origin countries rely more on debt financing compared to firms in common law countries, and they exhibit lower earnings volatility. Second, under weak judicial enforcement, firms tend to borrow more but they take less risk. Third, stronger creditor rights increase debt financing and reduce earnings volatility. Fourth, firm listing on a developed stock exchange shifts the capital structure towards more equity financing, and it increases the firm’s ability to borrow more when the judicial system is inefficient. The results reinforce the importance of strengthening laws and institutions as well as deepening capital markets in developing countries to improve financing conditions and investment outcomes.

Keywords: Corporate finance, Corporate investment, Financial management legal framework, Financial institutions, Developing countries, Corporate Decisions, Legal Origin, Investor Protection, exchange, debt, debt financing, creditor, creditor rights, checks, legal environment

JEL Classification: G15, G32, G34, O16

Suggested Citation

Turk-Ariss, Rima, Financial Decisions and Investment Outcomes in Developing Countries: The Role of Institutions (February 2015). IMF Working Paper No. 15/38. Available at SSRN:

Rima Turk-Ariss (Contact Author)

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Economic Research Forum ( email )

21 Al-Sad Al-Aaly St.
(P.O. Box: 12311)
Dokki, Cairo

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
PlumX Metrics