Local Financial Development and Corporate Financial Policy

Abstract

The aim of the present study is to explain both capital-structure and debt-maturity choices for small and medium-size firms in terms of institutional differences at the local level. In particular, local financial development, the effectiveness of the local enforcement system, together with other firm-specific characteristics, are considered. The empirical analysis is strictly based on the indicator created by (Guiso, Sapienza, & Zingales, 2004) while the methodological approach is similar to (Barclay, Marx, & Smith, 2003). We found that capital-structure and debt-maturity choices interact with each other and that corporate financial decisions are influenced by institutional factors. In contrast to (Barclay et al., 2003) and to reports in the Italian literature, the results of the analysis showed that leverage and debt-maturity are complementary factors. Leverage was found to be positively affected by local financial development while the enforcement system was less relevant. Debt maturity resulted longer in regions with better enforcement of the law, whereas local financial development did not play a relevant role. Other interesting findings regarding the role of credit worthiness, measured through the corporate financial rating, are also discussed.