International Journal of Financial Management

Open Access Open Access  Restricted Access Subscription Access
Open Access Open Access Open Access  Restricted Access Restricted Access Subscription Access

The Composite Effect of Stock Markets, Bank Stability, and Country-Level Institutional Factors, on Leverage


Affiliations
1 University of Rochester, USA, India
     

   Subscribe/Renew Journal


This paper analyses the relation between firms’ leverage, financial development, and firm-level characteristics namely, firm size, investment, accounting standards, tangibility of assets, and profitability. The paper finds that there is a negative correlation between financial development, measured as stock market turnover ratio or stock market capitalisation and firm’s leverage, while there is a positive correlation between financial development, measured as the stability of a country’s commercial banking system and firm’s leverage. As stock markets become more developed, leverage decreases. This decrease is more pronounced for smaller firms, compared to larger firms. As banks become more stable, leverage increases, and this increase is more pronounced for larger firms, compared to smaller firms. The paper also finds that leverage is lower for firms in politically unstable and more corrupt countries. Conversely, firms are more levered in countries with stronger protection of creditor rights. A higher restrictiveness on foreign direct investment significantly increases leverage ratios of firms.

Keywords

Leverage, Financial Development
Subscription Login to verify subscription
User
Notifications
Font Size

  • Barclay, M. J., & Smith, C. W. Jr. (1995). The maturity structure of corporate debt. Journal of Finance, 50(2), 609-631.

  • Beck, T., Demirgҫ-Kunt, A., & Levine, R. (2003). Law and finance: Why does legal origin matter? Journal of Comparative Economics, 31(4), 653-676.

  • Beck, T., Demirgҫ-Kunt, A., & Levine, R. (2006). Bank supervision and corruption in lending. Journal of Monetary Economics, 53(8), 2131-2163.

  • Beck, T., & Levine, R. (2002). Industry growth and capital allocation: Does having a market- or bank-based system matter? Journal of Financial Economics, 64, 147-180.

  • Bittlingmayer, G. (1998). Output, stock volatility, and political uncertainty in a natural experiment: Germany, 1880-1940. Journal of Finance, 53(6), 2243-2257.

  • Booth, L., Aivazian, V., Demirgҫ-Kunt, A., & Maksimovic, V. (2001). Capital structures in developing countries. Journal of Finance, 54(1), 87-130.

  • Carkovic, M., & Levine, R. (2005). Does foreign direct investment accelerate economic growth? Eds: T.

  • H. Moran, E. M. Graham, and M. Blomstrom, Washington, DC: Institute for International Economics (pp. 195-220).

  • Demirgҫ-Kunt, A., Feyen, E., & Levine, R. (2012). The evolving importance of banks and securities markets.

  • World Bank Economic Review, World Bank Group, 27(3), 476-490.

  • Demirgҫ-Kunt, A., & Maksimovic, V. (1998). Law, finance, and firm growth. Journal of Finance, 53(6), 2107-2137.

  • Demirgҫ-Kunt, A., & Maksimovic, V. (1996). Stock market development and firm financing choices. The World Bank Economic Review, 10(2), 341-369.

  • Demirgҫ-Kunt, A., & Maksimovic, V. (1999). Institutions, financial markets and firm debt maturity. Journal of Financial Economics, 54, 295-336.

  • Fan, J. P. H., Titman, S., & Twite, G. (2012). An international comparison of capital structure and debt maturity choices. Journal of Financial and Quantitative Analysis, 47, 23-56.

  • Frank, M. Z., & Goyal, V. K. (2009). Capital structure decisions: Which factors are reliably important?

  • Financial Management, 38(1), 1-37.

  • Giannetti, M. (2003). Do better institutions mitigate agency problems? Evidence from corporate finance choices. Journal of Financial and Quantitative Analysis, 38, 185-212.

  • Hart, O. (1995). Firms, contracts and financial structure: Clarendon lectures in economics. Journal of Political Economy, 106(2), 446-452.

  • Kelly, B. T., Pastor, L., & Veronesi, P. (2014). The price of political uncertainty: Theory and evidence from the option market. Fama-Miller Working Paper.Retrieved from http://ssrn.com/abstract=2356588 La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1997). Legal determinants of external finance.Journal of Finance, 52, 1131-1150.

  • La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1998). Law and finance. Journal of Political Economy, 106, 1113-1155.

  • Leary, M. T., & Roberts, M. R. (2009). The pecking order, debt capacity and information asymmetry. Journal of Financial Economics, 95, 332-355.

  • Levine, R. (1997). Development and economic growth: Views and agenda. Journal of Economic Literature, 35, 688-726.

  • Levine, R., & Zervos, S. (1998). Stock markets, banks, and economic growth. The American Economic Review, 537-558.

  • Mayer, C. (1988). New issues in corporate finance. European Economic Review, 32(5), 1167-1183.

  • Mayer, C. (1990). Financial systems, corporate finance and economic development. In R. Glenn Hubbard, Ed. Asymmetric Information, Corporate Finance and Investment. The University of Chicago Press, Chicago, IL.

  • Naranjo, P. L., Saavedra, D., & Verdi, R. S. (2014).Financial reporting regulation and financing

  • decisions. Retrieved from http://ssrn.com/ abstract=2147838 or http://dx.doi.org/10.2139/ ssrn.2147838

  • Pastor, L., & Veronesi, P. (2013). Political uncertainty and risk premia. Retrieved from http://ssrn.com/

  • abstract=1932420

  • Policies, and Long-Run Growth. World Bank Policy Research Working Paper Series. Retrieved from http://ssrn.com/abstract=1081783

  • Rajan, R. G., & Zingales, L. (1995). What do we know about capital structure? Some evidence from

  • international data. Journal of Finance, 50(5),1421-1460.

  • Santa-Clara, P., & Valkanov, R. (2003). The presidential puzzle: Political cycles and the stock market. The

  • Journal of Finance, 58, 1841-1872.

  • Titman, S., & Wessels, R. (1988). The determinants of capital structure choice. Journal of Finance, 43(1),

  • -19.

  • Voth, H. (2002). Why was stock market volatility so high during the great depression? Evidence from

  • countries during the interwar period. CEPR Discussion Paper No. 3254. Retrieved from http://

  • ssrn.com/abstract=306770


Abstract Views: 416

PDF Views: 0




  • The Composite Effect of Stock Markets, Bank Stability, and Country-Level Institutional Factors, on Leverage

Abstract Views: 416  |  PDF Views: 0

Authors

Anisha Nyatee
University of Rochester, USA, India

Abstract


This paper analyses the relation between firms’ leverage, financial development, and firm-level characteristics namely, firm size, investment, accounting standards, tangibility of assets, and profitability. The paper finds that there is a negative correlation between financial development, measured as stock market turnover ratio or stock market capitalisation and firm’s leverage, while there is a positive correlation between financial development, measured as the stability of a country’s commercial banking system and firm’s leverage. As stock markets become more developed, leverage decreases. This decrease is more pronounced for smaller firms, compared to larger firms. As banks become more stable, leverage increases, and this increase is more pronounced for larger firms, compared to smaller firms. The paper also finds that leverage is lower for firms in politically unstable and more corrupt countries. Conversely, firms are more levered in countries with stronger protection of creditor rights. A higher restrictiveness on foreign direct investment significantly increases leverage ratios of firms.

Keywords


Leverage, Financial Development

References