Creditor rights, corruption and capital structure: Evidence from emerging markets

Abstract

This paper investigates the impact of creditor rights on the relationship between corruption and capital structure. We hypothesize that creditor rights can mitigate the impact of corruption on capital structure. The data consists of 17,114 firms listed in 24 emerging countries during the period from 2012 to 2020. Our setting of emerging countries can be an interesting context because firms in these countries may rely more on debt than equity. In these countries, the corruption may be more severe and thus we expect that the impact of corruption on corporate capital structure may be more prominent. Using a pooled ordinary least square (POLS) regression model, we find that firms tend to use more leverage in countries with a high level of corruption. However, this relationship can be weakened in strong creditor rights countries. This result does not change when we employ random effects and fixed effects models. The results of this study imply that policymakers should consider improving the degree of creditor rights if they want to deal with the high level of corruption in a country.