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 of non-financial companies in a large panel of emerging economies, whilst controlling for macro-economic and firm-level factors, particularly corporate bond spreads. There is extensive literature showing that spreads are a measure of corporate riskiniess and that they affect a firm's ability to raise external funding via the issuance of equity or bonds. More recently, it has been established in development finance literature that a country's financial and legal systems have significant impacts on the capacity of its private sector to raise external investment funding. In particular, there is evidence that Common Law systems and market-based economies are more favourable to private investment and external financing owing to their stronger investor protection. 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, namely, "market-based" or "bank-based", and the legal framework (Common vs French law) 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