Relative Importance of Country and Firm-specific Determinants of Capital Structure: A Multilevel Approach

Abstract

This paper evaluates the relative importance of country and firm-specific determinants of capital structure using a multilevel modelling approach. Annual data for 18,201 public and non-financial firms from 66 countries are analysed for the period 2000-2016. Variance decomposition analysis is employed in order to assess the relative importance of country and firm levels. Additionally, random intercept and random coefficient models are used to analyse direct and indirect effects of capital structure determinants. Our results showed that country and firm levels explain approximately 10% and 60% of the total variability in capital structures, respectively. This shows that managers assign a higher importance to the firm-level factors when making capital structure decisions. Also country-level variables affect leverage choices to a lower extent.