The effects of economic conditions and financial market development on the capital structure of firms

This thesis aims to provide a cross-country comparison of the factors that affect the capital structure decisions of firms. The significance of firm-specific variables, the country-specific variables, and the industry of the firms is investigated by constructing a panel data set from a sample of firms operating in 14 countries. In order to analyze the significance of the country-specific factors which are time-invariant, Hausman-Taylor method of analysis has been implemented together with the fixed-effects model. The analyses of the whole sample, regions, and the countries demonstrate that the firm-specific variables are the right proxies for the parameters set forth in the theoretical framework. The research results suggests that the financing decisions of firms are highly influenced by the features of the banking system and the size of the stock market. In this study, it is demonstrated that well-functioning legal system facilitates borrowing. It is also proved empirically that the increasing transparency of firms leads to more equity financing and less debt usage. The analysis of pooled data with the aggregate tax rate implies that the firms use more debt in order to benefit from tax advantages as trade-off theory predicts. It is suggested that more accurate data and analysis is needed for developing countries. The conflicts between the different theories of capital structure can be resolved with the analysis of samples from countries bearing distinct features. Keywords: Capital structure, leverage, financial distress