Systematic Risk, Creditor Protection and Leverage – A Cross-Country Analysis

Abstract

The influence of systematic risk exposure on corporate financing decisions is receiving increasing attention in the empirical capital structure research. While most recent studies of the US-market show, that systematic risk (measured with asset beta) affects corporate capital structure decisions, little is known about cross-country differences regarding this relationship. In this paper we use institutional factors that represent the protection of creditors to explore the interaction effects between country-specific factors and asset beta on financing decisions. Our findings indicate, that (i) on average, firms with higher asset beta use less debt, (ii) the protection of creditor rights mitigate the negative impact of asset beta on leverage, (iii) the negative effect of asset beta on leverage is more pronounced for firms with higher levels of leverage and (iv) that especially in countries with weak protection of creditor rights, firms with high asset beta choose less leverage in economic downturns.

Keywords: Systematic Risk, Corporate Leverage, Capital Structure, Creditor Protection, Method of Mo-ments-Quantile Regression, Economic Downturns

JEL Classification: G15, G18, G32