Abstract:
This paper examines the effects of country-level governance—such as voice and accountability, political stability, government effectiveness, regulatory quality, rule of law, and control of corruption—on the capital structure and investment financing decisions of firms. The full sample consists of 31,749 firms in 65 countries between 1996 and 2017. We find that firms operating in countries with stronger governance decrease their leverage while increasing their debt maturity. Specifically, we show that they decrease their reliance on short-term debt issuance while they increase their reliance on long-term debt and equity issuances in financing capital expenditures. Our findings are robust to endogeneity issues and alternative model specifications.
