Have We Resolved The Issues Related to International Capital Structure? Empirical Evidence from The OECD Countries

I report that most cross-sectional deviations in international capital structure are caused by the heterogeneities of firm-, industry, and country-specific determinants rather than the influence of legal-institutional differences such as legal environment. In particular, most variations in international capital structure originate in the heterogeneity of firm-specific characteristics. Although the legal environment representing creditor protection could explain some differences in international capital structure, this evidence is at best only suggestive. However, the legal system, in general, seems to have a rather indirect effect on firm leverage through a conduit of firm characteristics. I do not find clear evidence to support that the indirect influence of the legal environments on leverage behavior is identifiable enough to prove a meaningful interaction between macroeconomic situations and the quality of legal protection underlying legal classification.

If the heterogeneities at the level of firm, industry, and country levels are controlled for, the English common-law countries surprisingly appear to rely highly on debt-leverage, whereas the German civil-law countries are likely to be least levered. This finding is contrary to a “received wisdom” associated with international capital structure. The heterogeneities appear to be related to a sample bias inherent in international databases. In particular, collateral value of assets, firm size, and debt-related tax shield benefit are generally viewed as the most influential factors in determining corporate leverage decision.

Most of the variations in international capital structure can be ascribed to the heterogeneity of

firm characteristics, rather than the macro economic factors once unobserved heterogeneous time variant effects are taken into account. The stylized relationships between firm-specific determinants and leverage ratios are not valid across international capital structure over time. I also find significant difference in the speed of convergence of actual capital structure toward target level across different legal environment under a dynamic setting. Thus, legal factors seem to play a significant role in deciding the speed of adjustment in leverage.