International Differences in Financial Leverage
While industry norms can say a lot about capital structure, other relevant variables such as taxation, regulation, bankruptcy costs, agency costs, and culture can vary widely across national borders.
Factors that help explain capital structure in an international environment:
Legal and Institutional Environment
Financial Markets and Banking System
Macroeconomic Climate
The table below summarizes how these factors may influence capital structure (not exhaustive).
| FACTOR | COUNTRY TRAIT | FINANCIAL LEVERAGE IMPACT | DEBT MATURITY |
|---|---|---|---|
| Court efficiency | Highly efficient | Lower | Longer |
| Legal system | Civil law | Higher | Shorter |
| Legal system | Common law | Lower | Longer |
| Tax system | Equity biased | Lower | N/A |
| Inflation | High | Lower | Shorter |
| Institutional Investors (ex. pension funds) | Many and well developed | Lower | Longer |
LESSONS
- CFA Level 2: Corporate Finance Part 1 – Introduction
- Introduction to Capital Structure and Leverage
- Introductory Capital Budgeting Remarks
- Expansion Projects vs. Replacement Projects and Cash Flows
- Impacts of Depreciation Method Choice on Capital Budget Analysis
- Inflation and Capital Budgeting
- Mutually Exclusive Capital Projects with Unequal Lives
- Equivalent Annual Annuity (EAA) Approach
- Least Common Multiple of Lives Approach
- Stand Alone Risk and Capital Projects
- CAPM and a Capital Project’s Discount Rate
- Capital Projects and Real Options
- Common Pitfalls in Capital Budgeting
- Capital Budgeting Alternatives to NPV and IRR Analysis
- Modigliani-Miller and Capital Structure Theory
- Evaluating Capital Structure Policy
- International Differences in Financial Leverage
- Dividend and Share Repurchase Policies
- Factors Affecting Corporate Dividend Policy Decisions
- Signals from Dividend Policies
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