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Economic forecast and corporate leverage choices: The role of the institutional environment

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  • Pindado, Julio
  • Requejo, Ignacio
  • Rivera, Juan C.

Abstract

We investigate how the expected performance of the economy affects corporate debt decisions using a broad sample of companies from developed and emerging economies. High transparency between lenders and borrowers and strong legal protection of the two parties involved in the lending relationship facilitate indebtedness. These characteristics simultaneously alleviate the pro-cyclical effect of the expected performance of the economy on debt. Conversely, inefficient insolvency regimes and high rates of default at a country level hamper corporate borrowing. In addition, firms' debt decisions are more sensitive to economic expectations in countries suffering these problems.

Suggested Citation

  • Pindado, Julio & Requejo, Ignacio & Rivera, Juan C., 2017. "Economic forecast and corporate leverage choices: The role of the institutional environment," International Review of Economics & Finance, Elsevier, vol. 51(C), pages 121-144.
  • Handle: RePEc:eee:reveco:v:51:y:2017:i:c:p:121-144
    DOI: 10.1016/j.iref.2017.05.006
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    Keywords

    Economic expectations; Capital structure; Transparency; Legal protection; Insolvency; Credit default;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • K29 - Law and Economics - - Regulation and Business Law - - - Other

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