The Effect of Regional Diversity and Institutional Distance on Firm Capital Structure: The Role of Creditor Rights

Abstract

Recent studies support the role of firm internationalisation as a determinant of capital structure because of its effects on bankruptcy and informational risk. The literature suggests that the dominant influence of firm internationalization on debt ratio is negative, although results differ. This may be due to institutional contingencies. Our main research hypothesis is that creditor rights moderate the relation between firm internationalisation and leverage. We also consider that firm internationalisation is a multidimensional concept that needs to be addressed by considering both institutional distance and inter-regional dispersion. Based on a sample of Euronext 150 multinationals, our results show a nonlinear negative relation between inter-regional dispersion and leverage, and a positive and linear relation between institutional distance and leverage. Our results also show that creditor rights in the multinational’s home country moderate the negative effect of regional dispersion on leverage. Moreover, multinationality coupled with higher creditor rights in host countries than in the home country influences leverage positively.