Institutional and geopolitical aspects of bond spreads impacts on corporate capital structure in emerging markets

This paper investigates the impacts of institutional, geographical, and political determinants of corporate capital structure in emerging economies, whilst controlling for macro-economic and firm-level factors, particularly corporate bond spreads. The development finance literature has established that a country's financial and legal systems have significant impacts on the capacity of its private sector to raise external investment funding. Our results show that, when macroeconomic and firm-level factors are controlled for, most institutional variables have no significant impact on capital structure, with the exception of regulatory quality. The type of financial system and the legal framework have hardly any impact on capital structure. Our results also address the endogeneity issue between corporate bond spreads and capital structure, and show that both variables interact significantly with each other. Firm-specific variables such as profitability, tangibility and macroeconomic performance were found to be the common determinants of both leverage and bond spread.