Determinants of Corporate Borrowing: A Comparative Study of Developed, Emerging and Developing Countries


Previous literature suggests that some predictions of the capital structure theory are portable across countries. But still there are persistent discrepancies and crossectional variations regarding choice of debt. Therefore not only firm specific, but country specific factors are also influencing firms’ choice of debt. The basic purpose of this dissertation is to investigate exactly which predictions of the theory are portable across and how debt choice is influenced by institutional features in developed, emerging and developing economies.

This particular study analyzes and compares the determinants of debt ratios using firm specific data from 2006 to 2016 for a sample comprised of 9536 non financial firms from 27 countries. Our sample of countries includes 10 each from developed and emerging and 07 from developing economic block. Panel data models have been used to test the impact of 09 firm specific attributes on debt ratios in individual countries. Comparison of results suggest that profitability and size of firm are two widely validated firm specific determinants of long term debt ratios across all countries irrespective of economic blocks they belong. Similarly assets structure and liquidity are consistent and most validated firms’ specific determinants of short term debt across all countries. Negative slopes of profitability, asset structure and liquidity are in line with pecking order hypothesis, while positive slope of size is in accordance with trade-off theory. Apart from profitability, size, asset structure and liquidity rest of regressors have different impact on leverage ratios in different countries. Thus we say that it is difficult to reconcile all firm specific factors under a single theoretical frame work. However theoretical predictions of pecking order theory are widely validated.

We also examine the impact of 06, country specific attributes on average long term debt ratios in each economic block using panel data models. Regression outputs show that countries characteristics differently influence average long term debt ratios in the three economic blocks. Bond market development in advanced countries is the only positive significant factor that affects average long term debt in developed countries. Results of emerging block show that both legal integrity and bond market development significantly influence firm’s choice to employ debt. In contrast to emerging countries, our results suggest that improvement in legal enforcement and integrity actually encourages firms in the developing countries to borrow more in long run.

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