Modigliani and Miller (1958) showed that in the case of efficient financial markets, the firm’s capital structure is irrelevant. The follow up theoretical work in the field takes into account the imperfections of markets and shows that capital structures emerge from three sources: firm-specific, country institutional and macroeconomic factors. The empirical research has focused on finding the best set of determinants of leverage (Titman and Wessel (1988); Frank and Goyal (2004)). Lack of comparable firm-level cross-country data has somewhat hindered the exploration of the significance of country factors. In the current paper I have evaluated the significance of all three sources.
The importance of the country of incorporation for firm leverage is only valued in few cross-country studies. Booth et al. (2001) show on a sample of firms from ten developing countries that country fixed effects explain a large share of leverage variation, but they do not evaluate what is behind the country effects. Using a sample of firms from developing Asian and South American countries Schmukler and Vesperoni (2001) explore the relationship between leverage and financial liberalization. Giannetti (2003) shows using Western European firms that financial development and creditor protection are significant determinants of leverage. Also using Western European firms, Jõeveer (2005) shows that half of the country-based explanatory power is determined by six country macro and institutional factors, while the other half is explained by unquantifiable institutional differences. Desai et al. (2004) use US affiliates data to show how a country’s tax rate explains the level of firm leverage.
The current study uses firm-level data from nine Eastern European countries over the period 1995–2002. Such a capital structure study based on firms from less developed economies is interesting since the country-specific determinants of capital structure noted in the theory (e.g. adjustment costs of capital, the asymmetric information between owners and investors) are expected to be especially significant. Therefore, firms from Eastern European countries, where modern financial markets only emerged in the last decades, are an excellent sample to study. The leverage of firms from transition countries in the early stages of transition has been studied by Cornelli et al. (1998), while Nivorozhkin (2005) and Haas and Peeters (2004) have studied the same for the later stages. This study complements existing studies by providing an in depth exploration of other country factors in leverage determination besides firm characteristics.
The empirical methodology of this paper is borrowed from Jõeveer (2005). First, an Analysis of Variance (ANOVA) was performed in order to detect the importance of the size, industry-, and country factors for leverage variation. Second, a regression analysis was used to compare the direction of the effect of the various leverage determinants in transition countries with the effects found in existing capital structure studies.
The paper is organized as follows. The next section provides an overview of related studies. Section three introduces the data and the estimation strategy. Section four contains the results and the last section concludes.
Contents
1. Introduction
2. Capital Structure in Transition Economies
3. Data and Methodology
4. Results
5. Conclusions
References
Appendices
- Appendix 1. Summary Statistics at 2000
Appendix 2. Anova Results for Listed Firms
Appendix 3. Anova Results for Unlisted Firms
Appendix 4. Anova Results for Listed Firms
Appendix 5. Anova Results for Unlisted Firms
Appendix 6. Leverage Regression in 1995–2002
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Sources of Capital Structure: Evidence from Transition Countries
