Institutional and Geopolitical Aspects of Bond Spreads Impacts on Corporate Capital Structure in Emerging Markets

Abstract

This paper investigates the simultaneous determinants of corporate capital structure and bond spread of non-financial companies between 1998 and 2016, whilst controlling for the impacts of institutional, geographical, and political factors. It has been established in the development finance literature that a country’s financial and legal systems have a significant impact on the capacity of its private sector to raise investment funding. Our results show that the impacts of Common Law and French Law systems, and of “market-based”/“bank-based” systems disappear once institutional variables, such as country income level and the effectiveness of government, of the rule of law, and regulatory quality are taken into account. Institutional factors determine capital structure, but not corporate risk. Both variables interact significantly with each other, whilst profitability, tangibility and macroeconomic performance were found to be the common determinants of both leverage and corporate bond spreads.

Keywords: Capital structure, corporate bond spread, emerging markets, bank-based vs market-based economies, simultaneous-equations

JEL Classification: G15, G18, G28