Capital Structures in Developing Countries

This study uses a new data set to assess whether capital structure theory is portable across countries with different institutional structures. We analyze capital structure choices of firms in 10 developing countries, and provide evidence that these decisions are affected by the same variables as in developed countries. However, there are persistent differences across countries, indicating that specific country factors are at work. Our findings suggest that although some of the insights from modern finance theory are portable across countries, much remains to be done to understand the impact of different institutional features on capital structure choices.     

Culture and capital structure: What else to the puzzle?

This paper investigates four of Hofstede's cultural dimensions –individualism, masculinity, uncertainty avoidance, and long-term orientation– influence on firms' choices of short-term and long-term capital structures. Cultures influence on corporate risk-taking may drive their debt-to-equity mix based on the higher of their equity book or market value. We empirically test culture influence with a sample of 5968 firms from five industry sectors, across 33 countries, over 2009–2017. We find firms national culture influencing their choices of short-term and long-term debt to book and market value of equity. The influence is more significant on the short-term than the long-term capital structures. Furthermore, it is more significant on the short-term debt to market value of equity and on the long-term debt to book value of equity. Our robustness checks at the firm-level, country-level and sample-level confirm and reinforce our main results. These findings would provide financial analysts, investors, and creditors an in-depth understanding when comparing international firms' capital structures.     

Does one size fit all? Determinants of insurer capital structure around the globe

As financial markets become more global, the question arises whether any country specific considerations are still relevant for insurance companies’ capital structure. This research examines this question with firm-level data across a broad range of countries including those in developing markets. What we find is that the optimal capital structure of insurance companies is not homogeneous across countries. We find that country-level factors explain a substantial fraction of the cross-sectional variation in insurance companies’ capitalization levels. Our results add to the current policy discussion on global regulatory capital requirements. If insurer capital structure is not homogeneous across countries, a global capital standard – if desired – should take differences in the institutional environments across countries into account to avoid market distortions.     

Bank Capital Ratios Across Countries: Why Do They Vary?

This paper extends the literature on bank capital structure by modeling capital structure as a function of important public policy and bank regulatory characteristics of the home country, as well as of bank specific variables, country macro-economic conditions and country level financial characteristics. The model is estimated with annual data for an unbalanced panel of the 78 largest private banks in the world headquartered in 12 industrial countries over the period between 1992 and 2005. The results indicate that bank capital ratios are significantly affected in the hypothesized directions by most of the bank-specific variables. Several of the country characteristic and policy variables are also significant with the predicted sign: banks maintain higher capital ratios in home countries in which the bank sector is relatively smaller and in countries that practice prompt corrective actions more actively, have more stringent capital requirements, and have more effective corporate governance structures.     

National culture and corporate cash holdings around the world

This paper examines whether cultural dimensions explain the variation in corporate cash holdings around the world as well as within the United States. We establish four major findings. First, in an international setting, corporate cash holdings are negatively associated with individualism and positively associated with uncertainty-avoidance. Second, individualism and uncertainty avoidance influence the precautionary motive for holding cash. Third, firms in individualistic states in the United States hold less cash than firms in collectivistic states. Fourth, we show that individualism is positively related to the firm’s capital expenditures, acquisitions, and repurchases while uncertainty avoidance is negatively related. Our findings remain unchanged after controlling for governance factors, firm attributes, and country characteristics.     

Financial Reporting Environments and International Capital Mobility

We examine whether differences in international capital mobility across countries are related to country‐specific differences in financial reporting environments. We hypothesize that countries where financial accounting environments lead to greater disclosure of value‐relevant accounting information are more likely to have higher international capital mobility. The results of empirical tests are consistent with our hypothesis.     

Who buys Bitcoin? The cultural determinants of Bitcoin activity

We examine the relationship between national culture and a country's Bitcoin activity. Given that Bitcoin is a high-risk currency/investment that is frequently used for illegal purposes and whose market is relatively opaque, we focus on the cultural dimension of individualism, which has been related to financial market participation, risk-taking behavior, and overconfidence. Using unique data that includes the originating country for Bitcoin transactions, we examine the relationship between individualism and a country's Bitcoin activity for a sample of 80 countries between 2009 and 2020. We find a significant and positive relationship between a country's individualism and its use of Bitcoin consistent with cultural values affecting the demand for such high-risk currency/investments.     

Foreign bank subsidiaries’ risk-taking behavior: Impact of home and host country national culture

This paper examines whether the risk-taking behavior of foreign affiliates of multinational banks is more influenced by the national culture of their parent banks’ home country or the national culture of foreign affiliates’ host country. The study uses a dataset of 292 foreign affiliates (i.e., subsidiaries or branch operations) operating in 66 countries having parent banks in 26 countries for empirical analysis. National culture of both home and host countries is measured with four dimensions—uncertainty avoidance, individualism, masculinity and power distance—of Hofstede's framework of national culture. Findings suggest that the national culture of parent banks’ home country has higher impact on the risk-taking behavior of foreign affiliates of multinational banks than the national culture of their host country. Specifically, foreign affiliates’ risk-taking is higher if parent banks’ home country has low uncertainty avoidance, high individualism and low power distance cultural values. This study extends our understanding that how informal institutions, such as the national culture, influence the financial decisions in multinational banks.     

Asymmetric tax competition in the presence of lobbying

This paper incorporates the influence of interest groups into the asymmetric tax competition model to explain the phenomenon that small countries do not necessarily set lower capital tax rates than large countries. In addition to the efficiency effect considered by the standard model, which leads the smaller country to set a lower capital tax rate, this present paper also takes account of the political effect arising from lobbying. We show that the smaller country may face less downward political pressure. If the political effect outweighs the efficiency effect, then the smaller country sets a higher tax rate than the larger country. This result has several welfare implications, which are in contrast to the conventional consequences.     

Foreign cultures, Sarbanes–Oxley Act and cross-delisting

Using a sample of foreign firms listed in U.S. and delisting shares over the period 2000 and 2010, this paper studies the impact of Sarbanes–Oxley Act (SOX) on the cross-delisting behavior of foreign firms based on the firm characteristics, legal tradition, overall culture and degree of individualism of the country of domicile. Pre-SOX, the propensity to delist is lower for firms from countries with cultural similarities to the U.S. and higher for firms from individualistic societies. Post-SOX these trends are reversed. Consistent with the existing research we find that the delisting decision of foreign firms cross-listed in the U.S. is based on the potential gains from listing based on the growth opportunities, length of presence in the U.S. and legal regulations of the country of domicile. Out findings provide evidence of the cultural factors that impact the competitiveness of U.S. capital markets.     

Capital Controls and the International Transmission of U.S. Money Shocks

We assess whether capital controls effectively insulate countries from U.S. monetary shocks, examining a large range of country experiences in a unified estimation framework. We estimate the effect of identified U.S. monetary shocks on the exchange rate and foreign country interest rates, and test whether countries with less open capital accounts exhibit systematically smaller responses. We find essentially no evidence of this. Other country factors such as the exchange rate regime or degree of dollarization explain more of the cross-country differences in responses. The significant differences in responses we do find are more pronounced at short horizons.     

Debt Tax Shields Around the OECD World

Taxes affect a company’s optimal capital structure, value, and cost of capital, but their impact depends on the tax regime of the country where the company operates. The OECD classifies the tax regimes of its member countries in seven groups. In this paper we offer a general model that encompasses those seven groups. We show that tax benefits of debt vary significantly across tax systems, and that using either Modigliani and Miller’s (1963) or Miller’s (1977) formulas in other tax regimes can lead to quantitatively important mistakes. We also find a significantly positive relationship between average leverage in OECD countries and our indicator of tax shields.     

国际资本流入的易变性及其对策研究

国际资本流入的易变性是影响一国金融稳定的主要因素,主要表现在国际资本在短期内过度流入,并在特定环境下迅速逆转。本文采用1980-2008年78个国家和地区的数据,运用变异系数法对国际资本的三种类型(直接投资、组合投资和其他投资)的易变性分别进行了测算和比较,并采用广义的自回归条件异方差(GARCH)模型,对易变性的决定因素进行了面板数据检验。结果表明,组合投资和其他投资的易变性要显著大于直接投资,经济增长率、制度质量对FDI易变性产生影响,而国内金融体系结构、汇率波动和通货膨胀等则造成各国非FDI资本易变性的差异。这一发现对各国资本流动管理具有重要启示。     

Firm Size and National Profiles of IFRS Policy Choice

Previous research on the International Financial Reporting Standards (IFRS) policy choices of large listed companies found a very strong association between policy choice and country. Nationally based pre‐IFRS practices largely explain IFRS policy choices. Nevertheless, some of the policy choices appear to be influenced from abroad, perhaps chosen in order to increase comparability. It has been suggested that smaller companies might be less influenced from abroad, and therefore might display even clearer national profiles of IFRS practice. This paper examines the accounting policy choices made within IFRS financial statements by small listed companies in five major countries. We find highly significant differences between the policies of small and large companies. We also find that small companies make more homogeneous choices, within a country, than large companies do. As a result, the previously published national profiles of the IFRS practices of large companies are misleading in the context of smaller ones.     

World markets for raising new capital

We examine the extent to which firms from different countries rely on alternative sources of capital, the locations in which they raise capital, and the factors that affect these choices. During the 1990–2001 period, firms raised about $25.3 trillion of new capital, including $4.9 trillion from abroad. International debt issuances are substantially more common than equity issuances, with debt (equity) issues accounting for 87% (9%) of all securities issued internationally, and about 20% (12%) of all public debt issuances. Market timing considerations appear to be important in security issuance decisions in most countries.     

Central banks and macroeconomic policy choices: Relaxing the trilemma

Macroeconomic policy choices in open economies are constrained by the trilemma according to which the objectives of exchange rate stability, monetary independence and capital mobility cannot be attained jointly. This paper shows that foreign exchange interventions provide an effective instrument to relax the trilemma. An active reserve policy allows central banks to pursue independent monetary and exchange rate policies when the capital account is liberalised.We use the framework of the portfolio balance model to show that exchange market interventions may substitute for capital controls. Both allow a country to achieve the other two objectives of the trilemma. Our empirical analysis of a large country panel data set covering the period 1970–2010 confirms this theoretical insight: the weighted sum of the three trilemma objectives increases in the degree of foreign exchange market intervention. The capacity to relax the trilemma constraint has increased over time and has been most effective in emerging markets.     

HOW FIRM CHARACTERISTICS AFFECT CAPITAL STRUCTURE: AN INTERNATIONAL COMPARISON

In this empirical study I examine the factors correlated with capital structure in France, Germany, Japan, the United Kingdom, and the United States. Although mean leverage and many firm factors appear to be similar across countries, some significant differences remain. Specifically, differences appear in the correlation between long-term debt/asset ratios and the firms' riskiness, profitability, size, and growth. These correlations may be explained by differences in tax policies and agency problems, including differences in bankruptcy costs, information asymmetries, and shareholder/creditor conflicts. The findings of this study suggest links between varying choices in capital structure across countries and legal and institutional differences.     

Capital structure effects of international expansion

This study investigates and qualifies the impact of internationalization on the capital structure of a firm. Previous studies have associated firm internationalization with foreign sales or foreign assets. However, an increase in sales volume generated abroad does not necessarily mean that a firm has actually invested in a new foreign country. This study examines non-financial firms included in the main developed stock indexes that report a new geographical area of operation. It reveals that, at less advanced levels of internationalization, growth in foreign volumes and new geographic expansion lead to differential decision-making in capital structure choices.This study concludes that (1) when the target foreign market is developed, the new market entry does not lead to significant changes in capital structure, whatever the past experience of the firm. (2) The capital structure of well-diversified firms is not significantly modified following a new foreign entry. (3) Both domestic firms and firms only active in developed markets significantly increase their debt to equity ratio when expanding into a region or country where they had no operation before. Well-diversified firms clearly exhibit a different behavior compared to firms in less advanced levels of internationalization.     

News spillovers in the sovereign debt market

We study the effect of a sovereign credit rating change of one country on the sovereign credit spreads of other countries from 1991 to 2000. We find evidence of spillover effects; that is, a ratings change in one country has a significant effect on sovereign credit spreads of other countries. This effect is asymmetric: positive ratings events abroad have no discernable impact on sovereign spreads, whereas negative ratings events are associated with an increase in spreads. On average, a one-notch downgrade of a sovereign bond is associated with a 12 basis point increase in spreads of sovereign bonds of other countries. The magnitude of the spillover effect following a negative ratings change is amplified by recent ratings changes in other countries. We distinguish between common information and differential components of spillovers. While common information spillovers imply that sovereign spreads move in tandem, differential spillovers are expected to result in opposite effects of ratings events across countries. Despite the predominance of common information spillovers, we also find evidence of differential spillovers among countries with highly negatively correlated capital flows or trade flows vis-á-vis the United States. That is, spreads in these countries generally fall in response to a downgrade of a country with highly negatively correlated capital or trade flows. Variables proxying for cultural or institutional linkages (e.g., common language, formal trade blocs, common law legal systems), physical proximity, and rule of law traditions across countries do not seem to affect estimated spillover effects.     

Determinants of Sovereign Wealth Fund Cross‐Border Investments

Using a sample of 1,590 purchases of stock by sovereign wealth funds (SWFs) in listed firms in 78 target countries between 1985 and 2011, we study the country‐level determinants of SWF cross‐border investment. We find that SWFs from countries with high levels of openness and economic development, but with less developed local capital markets, will make more cross‐country transactions, while target countries with higher levels of investor protection and more developed capital markets will attract more SWF investment. Our findings support the investment facilitation hypothesis, suggesting that SWFs act purely or principally as commercial investors facilitating cross‐border corporate investment.