Effects of internal and environmental factors on firm's financial behavior: a comparative study of developed, emerging and developing economies

In the presence of economic frictions, firms regulate their financial decisions infrequently; resultantly, most of the firms’ leverage is likely to differ from the optimum-level at the time of its readjustment. In such economic disturbance, internal and environmental factors are playing significant role for the readjustment of financial leverage. Keeping the influential role of leverage determinants, this study compares the dynamical economic effects of internal and environmental factors of capital structure in Spain, Malaysia and Pakistan to explore the empirical implications and hierarchical importance of firm, sector and country-level factors. Using cross-sectional regression of the panel data for the period 2001-2011, this study analyze the relative importance of each level of capital structure determinants and explanatory power of capital structure theories. The analysis findings documented several important indirect influences of variables at firm, sector and country-levels on firm determinants of leverage, as well as several structural differences in the financial behavior across developed, emerging and developing economies. From theoretical perspectives, findings of this study add important strands to capital structure literature and device lending mechanisms for firms on the basis of relative importance of environmental factors which also have the power to influence the firm’s leverage