Determinants of Capital Structure in Developing Countries

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Determinants of Capital Structure in Developing Countries
Tugba Bas*, Gulnur Muradoglu** and Kate Phylaktis***1

Second draft: October 28, 2009

Abstract This study examines the determinants of capital structure decisions of firms, specifically for small and private firms in developing countries. We use survey data from World Bank Enterprise survey which is not used before. We examine the differences in the determinants of capital structure decisions of private and listed firms and small and large firms. In accordance with the capital structure theory, the importance of firm level determinants of capital structure, tangibility, profitability and size are confirmed. Results are robust to the different definitions of size. Large and listed companies can have easy access to finance in developing countries, thus they have higher leverage and higher debt maturities. For small and private firms, access to finance is depended on the conditions of economic environment. Leverage and debt maturities are sensitive to macroeconomic factors. JEL Classification: G32, F30 Keywords: Leverage, debt maturity, small firms, private firms

* Corresponding Author: Tugba Bas, Cass Business School, 106 Bunhill Row, London EC1Y 8TZ, U.K., **Gulnur Muradoglu, Cass Business School, 106 Bunhill Row, London EC1Y 8TZ, U.K.,, ***Kate Phylaktis, Cass Business School, 106 Bunhill Row, London EC1Y 8TZ, U.K.,


The purpose of this paper is to investigate capital structure decision of firms in developing countries. We use firm level survey data for 25 countries in different stages of financial development from different regions. Our main focus is on small and private firms. Most theoretical and empirical studies in capital structure have focused on large listed companies for both developed and developing countries (see e.g, Rajan and Zingales, 1995; Booth et al., 2001; Demirguc-Kunt and Maksimovic, 1998, 1999). Since large listed firms can easily have access to both national and international financial markets, it could be misleading to accept and generalize the results of these studies for all types of firms, especially for small firms who might not have the same access to financial markets.

Small firms are important because they are the engines of economic development. They boost competition and entrepreneurship. They provide economy-wide efficiency, innovation and aggregate productivity growth. Countries, which encourage entrepreneurship and SMEs, have higher economic growth (Schmitz, 1989; Acs, 1992). Small firms enter the industry as agents of change and they introduce innovation (Acs, 1984; Acs and Audrestsch, 1988). SMEs are more productive and labour intensive. So the expansion of SMEs enhances employment more than large firms2. There are a number of studies which examine the capital structure decisions of small and medium size enterprises 3 . They are either examining a small sample of countries or the capital structure decisions of SMEs have been studied for a single country4 and on cross country5.

We investigate both private and public firms. We compare small firms to large companies. The countries we include are the developing countries from different regions at different level of financial development. We can differentiate between the firm-specific or country-specific factors impact. We use the World Bank Enterprise survey. We investigate the determinants of capital structure of firms for 25 developing countries covering all regions, Africa, East Asia and Pacific, Latin America and Caribbean, Middle East and North Africa and South Asia. We have

unbalanced panel data which include 27,826 firm year observations up to three years. We examine the firm level determinants of financial leverage including asset tangibility, profitability, size and controlling for country level factors, such as GDP per capita, growth rate of GDP, 2

The workforce employed in SMEs...
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