What Determines Debt Structure in Emerging Markets: Transaction Costs or Public Monitoring?

Abstract

We examine the predilection for private bonds over bank financing (debt structure) for emerging markets within the frameworks of both transaction cost economics and a transparency explanation, emphasizing the distinction between public monitoring (bonds) and private monitoring (banks), as well as considering the influence of culture on institutions. Employing several tests, including structured equation modeling, we find, among many results, that, in emerging markets, bonds are preferred over banks when there are less corporate opacity and fewer foreign access restrictions, as well as in environments of greater political instability, transaction costs, and limits to legal protection. Bonds are also favored over banks in cultural environments of greater uncertainty avoidance, masculinity, long-term orientation, and indulgence and less individualism. Overall, we attribute our results to culture and institutional quality together influencing debt structure, particularly by impacting attitudes toward public monitoring. Our results will be of great interest to researchers interested in the legal, social, and cultural environments of emerging markets.