Why Have Debt Ratios Increased for Firms in Emerging Markets?

Abstract

I study trends in capital structure between 1980 and 2004 in a sample of over 11,000 firms from 34 emerging markets. The average firm's book-value debt ratio rose by 10 percentage points over this quarter century; market-value debt ratios rose by 15 percentage points. I study how this rise in leverage was influenced by the firm-level demand for and the country-level supply of debt financing. The central finding is that the increase in debt ratios can largely be attributed to changes in the characteristics of emerging market firms over this period. For the average firm, the most prominent determinants of capital structure -- size, profitability, asset tangibility, and growth opportunities -- all shifted in the direction implying a higher optimal level of debt. On the supply side, increased financial development within the country is associated with lower debt ratios, but increased financial openness to foreign markets is associated with higher debt ratios.

Keywords: Emerging markets, capital structure, financial development

JEL Classification: G32, G15