Does the External Institutional Environment Impact Corporate Capital Structure? Evidence from Emerging Economies
Abstract
The relevance of the article stems from the lack of definitive conclusions about the influence of the external institutional environment on the speed of adjustment (SOA) to target capital structure in emerging economies. We assess the external institutional environment by the quality of law and the quality of law enforcement. We then explore the impact of external institutional environment on the SOA to target leverage for companies from emerging economies. We employ a linear partial adjustment model with fixed company effects, estimated using the Blundell-Bond method. The dataset includes 2,729 firms from 17 emerging economies over the period of 2010–2019. The value of SOA to target leverage is calculated for each country from the sample, taking into account the external institutional environment. A positive effect of law enforcement
on the SOA of companies is revealed, although this influence is weak. Furthermore, grouping countries by the quality of the external institutional environment allows us to show that countries with the “best” institutions have a higher SОА than countries with the “worst” institutions for most indicators of external institutional environment quality. The final results provide empirical confirmation of the significant influence of law enforcement and of most indicators of law quality on the SOA of companies in emerging economies, which has not been proven previously in the scientific literature.
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References
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