Capital Structures in Developing Countries Eighth

CapitalStructuresinDevelopingCountriesEighthdraftOctober1999LaurenceBooth,VaroujAivazian,AsliDemirguc-Kunt,VojislavMaksimovic**BoothholdstheNewcourtChairinStructuredFinanceintheRotmanSchoolofManagementattheUniversityofToronto.AivazianisProfessorintheDepartmentofEconomicsandRotmanSchoolofManagementattheUniversityofToronto.Demirguc-KuntiswiththeWorldBank,andMaksimovicisProfessorintheSchoolofBusinessattheUniversityofMaryland.CapitalStructuresinDevelopingCountriesABSTRACTThisstudyusesanewdatasettoassesswhethercapitalstructuretheoryisportableacrosscountrieswithdifferentinstitutionalstructures.Weanalyzecapitalstructurechoicesoffirmsintendevelopingcountries,andprovideevidencethatthesedecisionsareaffectedbythesamevariablesasindevelopedcountries.However,therearepersistentdifferencesacrosscountries,indicatingthatspecificcountryfactorsareatwork.Ourfindingssuggestthatalthoughsomeoftheinsightsfrommodernfinancetheoryareportableacrosscountries,muchremainstobedonetounderstandtheimpactofdifferentinstitutionalfeaturesoncapitalstructurechoices.1Ourknowledgeofcapitalstructureshasmostlybeenderivedfromdatafromdevelopedeconomiesthathavemanyinstitutionalsimilarities.Thepurposeofthispaperistoanalyzethecapitalstructurechoicesmadebycompaniesfromdevelopingcountriesthathavedifferentinstitutionalstructures.Theprevailingview,forexampleMayer(1990)seemstobethatfinancialdecisionsindevelopingcountriesaresomehowdifferent.MayeristhemostrecentresearchertouseaggregateflowoffundsdatatodifferentiatebetweenfinancialsystemsbasedontheAnglo-SaxoncapitalmarketsmodelandthosebasedonaContinental-German-Japanesebankingmodel.However,becauseMayer’sdatacomesfromaggregateflowoffundsdataandnotfromindividualfirmsthereisaproblemwiththisapproach.Thedifferencesbetweenprivate,public,andforeignownershipstructureshaveaprofoundinfluenceonsuchdata,buttellusnothingabouthowprofit-orientedgroupsmaketheirindividualfinancialdecisions.Thispaperusesanewfirm-leveldatabasetoexaminethefinancialstructuresoffirmsinasampleoftendevelopingcountries.Thus,thisstudyhelpsdeterminewhetherthestylizedfactswehavelearnedfromstudiesofdevelopedcountriesarestatisticalartifactsofthesemarkets,orwhethertheyhavemoregeneralapplicability.Ourfocusisonansweringthreequestions:(1)Docorporateleveragedecisionsdiffersignificantlybetweendevelopinganddevelopedcountries?(2)Arethefactorsthataffectcross-sectionalvariabilityinindividualcountries’capitalstructuressimilarbetweendevelopedanddevelopingcountries?(3)Arethepredictionsofconventionalcapitalstructuremodelsimprovedbyknowingthenationalityofthecompany?Thislastquestionisparticularlyimportant,sincedifferentinstitutionalfactors,suchastaxrates2andbusinessrisk,canresultindifferentfinancingpatterns,whichthenshowupinfirmdataaswellastheaggregateflowoffundsdata.Therefore,itisinterestingtoconsiderthevalue-addedofcompanyanalysisversusasimplecountryclassification.Veryfewstudieshaveusedcross-countrycomparisonstotesttheoriesoffinancialstructure.RajanandZingales(1995),usefourkeyindependentvariablestoanalyzethedeterminantsofcapitalstructuresacrosstheG-71countries:thetangibilityofassets,market-to-bookratio,logarithmofsalesasasizeproxy,andameasureofprofitability.Ourdataarefortendevelopingcountries:India,Pakistan,Thailand,Malaysia,Turkey,Zimbabwe,Mexico,Brazil,Jordan,andKorea.ThesetencountriesincludefiveformerBritishcolonies,twoLatinAmericancountrieswithacommoninflationaryexperience,andthreeothers.Hence,aswellasreflectingtheAnglo-SaxoncapitalmarketsandtheContinental-German-Japanesebankingsystems,thereisadiversityofculturalandeconomicfactorsthatshouldseverelytestwhetherextantcapitalstructuremodelsareportable.Ourfindingssuggestthatalthoughfirmsindevelopingcountrieshavelesslong-termdebtthandofirmsindevelopedcountriesandtheroleofspecificcapitalstructuredeterminantsthereforemaydiffer,thereislittlethatis“special”aboutdevelopingcountries.Ourempiricalmodelsshowresultsthatwouldnotlookoutofplaceinasimilarstudyoffirmsfromdevelopedeconomies.Althoughcapitalstructuresdodiffersystematicallyacrosscountriesandcountryfactorsareclearlyimportant,thefinancialfactorsthatareimportantindevelopedcountriesarealsoimportantindevelopingcountries.Thus,ourworkjustifiestheimportanceoffactorslikethetangibilityofassets,size,themarket-to-bookratio,businessrisk,andprofitabilityvariablesindeterminingcapitalstructurechoiceacrosscountries.However,ourworkalsoemphasizestheimportanceofcountry-specificfactors.Thesizeandsignificanceofthesefinancialvariablesdiffersacrosscountries,whereina“world”capital3structuremodel,country-specificfactorsarealmostequallyasimportantasthefinancialvariables.Asaresult,thereisstillmoreresearchneeded.Forexample,whatexactlyismeantby“countryfactors?”Arethesejustdifferenteconomicfactors,suchasinflationandeconomicgrowth,ordotheyreflectdifferentlegalandaccountingsystems?Orisitsomethingentirelydifferentthatreflectsdifferentculturaltraditions?Perhapssomeoralloftheabove?Thepaperisasfollows:SectionIdiscussesthedatasetandtheprincipalcharacteristicsofthefinancingpatternsinthetendevelopingcountries.Section