Corporate Governance

Capital Structure and Debt Maturity Choices

By Harvard Law School Program on Corporate Governance

In the paper, An International Comparison of Capital Structure and Debt Maturity Choices, forthcoming in the Journal of Financial and Quantitative Analysis, my co-authors (Joseph Fan and Garry Twite) and I examine the influence of institutional environment on capital structure and debt maturity choices by examining a cross-section of firms in 39 developed and developing countries.

The country in which a firm resides has a greater influence on its capital structure than its industry affiliation. Specifically, a regression of firm leverage, measured as the book value of debt over the market value of the firm, on firm-specific variables, industry fixed effects and country fixed effects, has an adjusted R-square of 0.19. When the regression is estimated with industry but not country fixed effects, the adjusted R-square is reduced to 0.15. However, in a regression that includes country dummies but not industry dummies the adjusted R-square is reduced by only half as much, to 0.17. A similar regression with debt maturity, measured as the book value of long-term debt to the book value of total debt, as the dependent variable, has an R-square of 0.25, when all variables are included. When country fixed effects are excluded from the regression the R-square is substantially reduced to 0.09, but when the country fixed effect are included, but the industry fixed effects are excluded, the R-square is only slightly reduced to 0.23.

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Full post as published by The Harvard Law School Corporate Governance Blog on December 22, 2010 (boomark / email).