Capital Structure and Assets Risk: Evidence from the Euro Area

Abstract

Using a sample of non-financial listed firms located in the Euro area, I investigate the determinants of capital structure choices. In line with the traditional theoretical approach, and in contrast with previous empirical literature, I use a full market-value measure of leverage, estimated with the Black-Scholes-Merton model for pricing corporate debt. Differences in national tax rules are explicitly taken into account when estimating firm-specific marginal tax rates. In the cross-section regressions for firm leverage I find that some variables have similar effects across countries, while others play a different role. Assets risk, measured as the annualized volatility of the market enterprise value, is the best predictor of observed leverage ratios. The sector of activity is a significant factor in determining leverage decisions, even when assets’ risk is taken into account. Despite the monetary union and the increased financial integration in the Euro Area, nationality is still a significant determinant of capital structure decisions.