An International Comparison of Capital Structure and Debt Maturity

Choices

Summary

Introduction

There is they examining the corporate financing of the firms and capital structure of the firms.

And find these in different countries and see the law and rolls for these. In the study explore 2

factor first is the find the issue within the firms and industry fixed effect across the countries and

also identified the capital structure, and second is this study find the firm characteristic which is

not explore before.

There in the study they run the regression model for see the result in fixed effect, country, and

also include all the variable than see the results. After these experiment they know about how

industry finance within across countries first order effect by the capital structure. There is a large

sample size take 39 countries and run the regression model on these countries companies’ data.

They see the capital structure how it is different of the countries by tax laws, legal laws and the

important regulation for financial firm.

There they find countries where more tax gain their more debt use, and the developing

economies there is not find the relation between tax laws and debt ratios. In this study find the

country good legal environment and public policies also effect the firm capital structure and

where laws are not really good so in their high corporate debt and low the maturity of debt.
There also find the supplier of the capital effected of the capital structure. In the countries where

larger the banking sector short the maturity of debt but the collaboration between financing

choices and size of the insurance industry are weak. In countries where the firms use pension

fund for long term debts. They find the firm in the countries where they have a larger

government bond but lower the debt ratio and high the maturity.

Section 2

In this section study about the differences between the countries and how their firms financing in

their 1) the ability of the creditors to enforce the legal contract, 2) the tax laws about debt and

equity and 3) the important regulation about financial firms which is represent major suppliers.

Legal system

There are some problem like a conflict of interest between internal employees, managers, and

shareholders so de discuss how these factors effect by law and how these effect the firm

financing. The countries where weak laws so their also the enforced financial instrument like a

short-term of the debt. Find out to protect the external investor across the developed and

developing countries. There is in the study test in whether the case which is define the indicator

variable takes the value of 1 when they follow the legal system about common law otherwise 0.

The other important factor which is the enforceability of the law, which is masseur by the

corruption level in a country, and the corruption is the very important factor which is shape the

countries legal system.

Tax code

The tax is a very important factor in general, the tax treatment of interest and dividend payment

and show the important factor which is influencing the capital structure. There is 3 main category

of the tax regime discus.

The first is the classical tax system where is the dividend are taxed both in personal and

corporate level and interest payments are tax-deductible the corporate expenses.

Second in the dividend relief tax system where the dividend payment ae taxed is the reduced rate

at the personal level. In some countries dividend fully relief tax system.

Third is the dividend imputation tax system, this system means when the corporation deduct

interest payment, but there is the local shareholders to receive a tax credit by the taxes paid by

the corporation. The main objective of the system the tax profit for the corporation it once.

Suppliers of the capital

This study about the financial economist viewed the capital structure from the firm prospective

and where they face the competitive and complete financial market and also where the debt and

equity offered in the equal risk rate and then they see how firm financed. For example the Miller

(1977) model by this model they check the debt ratio in the economy and the investor

performance and for holding debt and equity securities.

There in the study specifically looking the bank, pension fund and insurance companies. Banks

have short term liabilities and they also short term debts, there is the pension fund have long term

liabilities and also preference long term assets. They expecting in the countries where high
banking sector they use short term financing firm and the countries where larger the pension

fund and insurance companies so in there use long term financing firm.

Section 3

In the study include the variable in the form of set which is effecting the leverage and maturity

structure, these variables included the assets tangibility (fixed and over total assets), profitability

(net income over total assets), and firm size (natural logarithm and of total assets) and the last

one is the market to book ratios (market value of equity and over the book value of equity).

Section 4

In this section select the data sample and sources of data and then introduce the empirical

procedure for employed in the study.

Sample selection

The primary source of the data for this study is the world level there is they select the firm from

world 50 countries sample which are listed in countries stock exchange in the study analysis

covered the time period from 1991-2006. The final sample was the 36,767 firms from 39

countries, there are showing the result in the tables which in the paper in first tables show the

developed and developing countries firms.

Financing pattern

Our masseur of capital structure

1) Leveraged, masseur the total debt market value of the firm (total debt/market value) the total

debt value is defined the book value of the firm short and long term and the interest value taking
from the market value of the firm and common equity plus the book value of the total debt and

preferred stock.

2) There is show the debt maturity, masseur the proportion of the book value of the long term

debt to total debt (long term debt/total debt).

In the study result show in the form of diagram from 1991-2006.

Regression analysis

This section show the regression analysis on bases of the data which collected than see the result

how is effected the firm capital structure. In the study use the generalized method of moment

(GMM).

There is some table which is show the data and run the regression analysis. Table 4 in first

column show the report the regression 2 column show the data of the developed economies and

in column 3 show the data of the developing economies in column 4 and 5 show the evidence of

the period of 1991-1998 and 1999-2006 respectively.

Firm effect

In the tables show the coefficient of the firm data and see the result which is firm specific

variable and the coefficient result show the relation with assets tangibility and firm size

negatively related and profitability ratios.

Country effect
The table 4 half of the show the coefficient of the country variable. These coefficient show the

positive related with economic development but unrelated of the inflation and inflation volatility.

They find the corruption is associated of high debt ratio and the common law associated with low

debt ratio.

Firm effect

There is explain the table 5 where is the maturity structure regression and the regression are

estimated by the sample are subsample. The data of the period in the form of two parts first

1991-1998 and second 1999-2006.

Country effect

There are explain the coefficient of the variable show that debt maturity negatively related to the

level of corruption and the positive related with the common law. Where is lower corruption so

there is investor more protected and long term financing and where corruption level high so there

investor are unprotected and also short term financing.

Section 5

In this section of the study developed the regression results which is indicate that a firm’s capital

structure is consider more by the country in which it is located than by its industry affiliation,

suggesting that the institutional environment can have a profound effect on how firms are

financed.
And also they there is find that a country’s taxation law and system, level of corruption, and the

preferences of capital suppliers (banks and pension funds) explain a significant portion of the

variation in leverage and debt maturity ratios.

There is the effects of taxes on the capital structure choices are continues with theory. When the

tax gain from leverage is positive, firms tilt their capital structures toward more debt. However,

as we note below, the tax effect is not as strong and pervasive as other influences on capital

structure. The legal environment also has an important influence on capital structure choices.