Academic journal article Journal of Emerging Trends in Economics and Management Sciences

Institutional Determinants of Financing Decisions of Firms: The Case of Transition Economies

Academic journal article Journal of Emerging Trends in Economics and Management Sciences

Institutional Determinants of Financing Decisions of Firms: The Case of Transition Economies

Article excerpt

Abstract

This paper goes beyond the scope of analysis of financial theories that weakly incorporate the impact of the institutional environment. In particular, we seek to demonstrate the empirical relevance of institutional factors (legal, economic and governmental) in order to study the financial behaviour of firms. Furthermore, capital structure studies had mainly focused on firms in developed countries and little attention is given on how firms in developing and emerging market decide on its capital structure decisions. Based on a sample of 41 developing countries, the empirical results show that the development of financial system, the regulation of the bank sector, the openness of trade policy, the political stability and the level of corruption determine the financing choices of the firms. Our results confirm that institutional factors specific to countries in transition prevent generalization of Anglo-Saxon results

Keywords: capital structure, governance system, transition economies, level of corruption

INTRODUCTION

The question of the determinants of financial structure focuses on firm-specific variables such as size, asset structure, profitability and growth opportunities (John and litov 2010 and Frank and Goyal 2009). Although the financial literature suggests that financial funding decisions are influenced by the extent of agency conflicts and the level of information asymmetry, it ignores the possible mediation of the quality of the institutional framework (law efficiency, economic openness, economic transparency, corruption level...)!

Recently, the integration of the institutional dimension such as the country's financial system (Levine 1998, 1999 and 2000) and the legal system (LaPorta et al 1997, 1998 and Fan, Titman and Twite 2011) seems to generate a new approach of the issue of financial behaviour of the firm. However, several shortcomings remain to be raised. First, the work that has attempted to conduct a synthetic survey that includes a wide range of institutional variables is rare. Second, the increase in international databases (Heritage Foundation, International Transparency, Kaufmann, Kraay, Mastruzzi/World Bank and Doing Business)' seems to expand the vector of institutional variables. The publication of the indices that seek to quantify the factors often referred to as qualitative (such as the government integrity and the countries' corruption level) is a factor that motivates the empirical investigations to test the impact of institutions on firms' financing decisions. Third, most studies dealing with the same topic have focused on developed countries and often dismissed the transition economies (Fan, wei and Xu 2011). However, The world is dominated by emerging economies in terms of population and geographic size More and more institutional and behavioral differences between firms in emerging markets and those in developed markets are discovered (see for example the report of the Center of International Private Enterprise 2008).

By adopting the hypothesis that argues that the environmental context determines the boundaries of firms' financing (North 2003), we seek to assess the impact of the "quality" of the legal, economic and political environment on the financing behaviour of companies. Our attention will be focused on countries in transition. Indeed, these countries have conducted a series of legal and economic reforms, and at the level of organizations aiming at achieving a change of ftinding ways to channel the transition from indirect finance (financial intermediary) to direct finance (market financing). To reveal some answers to our research problem, this paper is organized as follows: the first section includes a review of the work that has highlighted the impact of institutional quality on firms' financing decisions. The second section presents our methodological approach, the characteristics of our sample as well as the hypotheses to be tested will be also discussed. …

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