Determinants of capital structure in ASEAN5 +3: a study of cross-country portability of financing theories and the impact of institutional factors in ASEAN5 +3 firm\u27s financing decisions

This paper investigates the financial and institutional determinants of corporate capital structure in ASEAN5 +3 firms. The study examines whether the three main financing theories (static trade-off, pecking order hypothesis and agency theory) are applicable in the ASEAN5 +3 setting. Using a panel dataset for the period of 2000-2004, we model three different leverage measures, namely: total debt ratio, long-term debt ratio and market long-term debt ratio, with firm specific characteristics and industry effect variable. Moreover, we employ the two-stage procedure proposed by Fan and Titman (2004) in order to determine the country specific factors that affect corporate capital structure. Our results suggest that leverage increases with asset tangibility, risk, and size, while it decreases with profitability and market to book ratio. Among such variables, profitability, which is a proxy for the pecking order hypothesis, has significant explanatory power across the three leverage measures. We also find that firm size is positively related to leverage measures, which partly supports the static trade-off theory. However, we find that asset tangibility and risk are positively related with leverage which deviates from our a priori expectations. Moreover, we also find that ownership concentration is negatively related to total debt ratio which is consistent with the passive voting hypothesis. On the other hand, our results show that ownership concentration is positively related to long-term debt ratio which concurs with the active monitoring hypothesis. Industrial firms, as opposed to natural resources firms, are also found to have lower debt ratios. Country specific factors such as rule of law, inflation rate and corruption index prove to significantly affect the different leverage measures. Therefore, the corporate capital structure decision in ASEAN +3 firms is not only influenced by its financial characteristics but also by factors like the environment and country factors