Abstract
We provide evidence on leverage and debt maturity targeting in a large international setting. There are key differences in the relative importance of institutional factors in explaining actual as opposed to target capital structures. Targets and target deviations are plausibly influenced by the institutional environment. Firms from countries with strong legal institutions target lower leverage and higher long-term debt, whereas better-functioning financial systems result in lower target leverage and long-term debt. Financial crisis has shifted the desired structure of the securities toward shorter maturities and has led to more prevalent target deviations. Better institutions significantly decrease the likelihood of target deviations.
Highlights
Journal of Risk and FinancialThe importance of capital structure for corporate and real outcomes has been extensively recognized in the extant literature for both small- and medium-sized enterprises (SMEs) and listed firms from developed as well as developing economies (e.g., Anton2019)
Mean statistics are provided for the actual leverage, the estimates of the target leverage, and the t-tests of the difference between the estimated targets and the observed capital structures separately for each of the 46 countries and the overall sample during the 1989–2017 period as well as the three sub periods: before, during, and after the global financial crisis
External In Development summary, the results indicate important differences inGovernance the relative importance of Governance institutional and financial development determinants in explaining the total variation in Strong actual and target leverage,Bank both inMarket terms of Poor their magnitudes as well as their rankings, consistent with Hypothesis 1 (H1)
Summary
Journal of Risk and FinancialThe importance of capital structure for corporate and real outcomes has been extensively recognized in the extant literature for both small- and medium-sized enterprises (SMEs) and listed firms from developed as well as developing economies (e.g., Anton2019). A firm’s financing choice is reflected by its observed debt ratio and by its target debt ratio and its deviation from the target. Such a target can be established by trading off the costs and benefits of debt, including bankruptcy costs, tax benefits, and agency costs. The credibility of this capital structure model hinges on the nature of the target determination and the adjustment process. If the estimates of target capital structures are meaningful, the cross-sectional tests of the fitted targets and target deviations should reliably reflect these costs and benefits
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