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The regulatory environment and financial constraints of private firms in the European Union

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  • Casino-Martínez, Alejandro
  • López-Gracia, Jose
  • Mestre-Barberá, Reyes

Abstract

This study analyzes the influence of the institutional environment on firms' capital structure in the European Union (EU). Unlike other research, we focus on private firms and include data from all EU countries from 2010 to 2018. We split the sample into groups of small and large firms, which we consider financially constrained and unconstrained, respectively. Throughout the study, we posit that institutional effects on financing policies vary with size, with the effects being greater for constrained firms as they face more financing frictions. We also run regression models controlling for firm-level characteristics and relevant macroeconomic factors. Our findings reveal that a high-quality regulatory environment negatively affects firms' leverage, whereas social corruption has the opposite effect. Moreover, the efficiency of enforcing commercial contracts and developing the financial system positively influences firms' leverage.

Suggested Citation

  • Casino-Martínez, Alejandro & López-Gracia, Jose & Mestre-Barberá, Reyes, 2023. "The regulatory environment and financial constraints of private firms in the European Union," Global Finance Journal, Elsevier, vol. 55(C).
    • Handle: RePEc:eee:glofin:v:55:y:2023:i:c:s1044028322001004
    DOI: 10.1016/j.gfj.2022.100798
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    More about this item

    Keywords

    Capital structure; Institutional environment; Private firms; Financial constraints; Size;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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