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International Differences in Financial Leverage

CFA® Exam, CFA® Exam Level 2, Corporate Finance

This lesson is part 17 of 20 in the course Corporate Finance Part 1

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
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In this Course

  • CFA Level 2: Corporate Finance Part 1 – Introduction
  • 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
  • Introduction to Capital Structure and Leverage
  • 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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