Capital Structure Variation across Europe: Decomposing Country-, Industry- and Firm-Specific Effects on Leverage

Abstract

I find that corporate European leverage variation between 2007 and 2015 is largely driven by firm and industry characteristics. Conventional, time-varying firm characteristics explain as much leverage variation as country and industry fixed effects combined. Cross-sectional leverage disparities are more distinct between industries than between countries. Corporate tax rate does have a significant positive effect on leverage, as predicted by the traditional tradeoff theory. The impact is however negligibly small relative to firm- and industry-specific effects. Evidence on both the tradeoff and pecking order model is, at best, mixed. Moreover, macroeconomic conditions are largely insignificant and unable to explain leverage differences in a linear regression context. Macroeconomic effects on capital structure might however channel through firm and industry determinants, thus affecting financing choice indirectly. A more dynamic, possibly nonlinear model specification is needed. Effects of the financial crisis of 2008 and the subsequent European debt crisis are apparent across all of corporate Europe and are most severe for Southern European firms.