Country- and Firm-level Determinants of a Firm’s Capital Structure: Evidence from Transition Economies

Abstract

The aim of this study is to examine country-level and firm-level determinants influence on capital structure decisions made by firms’ managers. Financial leverage is chosen as the proxy for a firm’s capital structure. As an object of this study 6,500 firms operating in 28 countries with transition economies were selected. The sample of transition economies encompasses 16 countries of Central and Eastern Europe and 12 CIS countries. There was a little research done on capital structure determinants in the context of transition economy. Moreover, the majority of academic papers published in that field were primary focused on firm-level determinants. Unlike those, this research concentrates on both: micro- and macro-level determinants of financial leverage. The analytical tool of that study is linear regression model that allows revelation of different factors effect of the capital structure. The major distinctive point of this study is incorporation of interaction terms into regression model that determine the difference in particular variable effect on financial leverage. This study represents academic importance for the countries with transition economy and allows undertaking empirical analysis of capital structure determinants at the micro- and macro-level. The practical aspect of that study is that different regression models implementation allows managers to observe significance of particular scope of firm- and country-level determinants of financial leverage under different terms. Furthermore, establishment of interaction terms between firm- and country-level determinants of financial leverage is a useful tool for sensitivity analysis of capital structure determinants to external affects. This enables managers to collect more detailed information about the risks involved that promotes more adequate capital structure decision making.