What is it about?

This paper analyzes the effect of bank market concentration and institutions on capital structure in 39 countries. Results for 12,049 firms over 1995–2004 indicate that firm leverage increases with greater bank concentration and stronger protection of creditor rights, but drops with stronger protection of property rights.

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Why is it important?

First, we analyze the influence of bank concentration and institutional characteristics not only on firm leverage but also on the firm-level determinants of leverage. Our analysis shows that either the pecking order or trade-off theories apply differently across countries, depending on institutions and bank concentration. Weaker protection of property rights increases the agency cost of external funds, leading to the preferential use of internal funds as posited by the POT. The TOT, however, is more valid in countries with stronger protection of property rights. Second,we analyze the interaction of bank concentrationwitha country's legal and institutional system(protection of property and creditor rights) to reduce agency costs and mitigate information asymmetries between shareholders and debtholders. The results suggest that greater bank concentration can substitute for creditor protection and asset tangibility to reduce the agency cost of debt. Third, we analyze more countries than most previous studies. We include a sample of 12,049 firms in 39 countries over the period 1995–2004 (the same number of countries as Fan et al., 2006), compared to seven countries in Rajan and Zingales (1995), eight countries in Giannetti (2003), and ten in Booth et al. (2001).We thus can provide information on a greater range of institutional differences to give us a deeper understanding of how capital structure depends on institutions and on bank concentration. Finally, we account for dynamic processes in firm leverage using generalized-method-of-moments (GMM) estimators developed by Arellano and Bond (1991) for dynamic panel data. GMM models are designed to handle autoregressive properties in the dependent variable (firm leverage) when lagged values are included as explanatory variables and endogeneity in the explanatory variables (other firm-specific characteristics) must be controlled for. Although the GMM method has been used in studies on capital structure focusing on a single country, it has not yet been applied in studies using international data.


I enjoyed writing this paper. It was important in my academic career.

Victor Gonzalez
Universidad de Oviedo

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This page is a summary of: Influence of bank concentration and institutions on capital structure: New international evidence, Journal of Corporate Finance, September 2008, Elsevier, DOI: 10.1016/j.jcorpfin.2008.03.010.
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