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).

FACTORCOUNTRY TRAITFINANCIAL LEVERAGE IMPACTDEBT MATURITY
Court efficiencyHighly efficientLowerLonger
Legal systemCivil lawHigherShorter
Legal systemCommon lawLowerLonger
Tax systemEquity biasedLowerN/A
InflationHighLowerShorter
Institutional Investors (ex. pension funds)Many and well developedLowerLonger
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