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Financing decisions of firms: the roles of legal systems, shareholder rights and creditor rights
Author(s) -
Özer Gökhan,
Çam İlhan
Publication year - 2021
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/acfi.12681
Subject(s) - leverage (statistics) , creditor , debt , finance , business , capital structure , dividend , equity financing , external financing , equity (law) , debt to equity ratio , corporate finance , gearing ratio , financial system , monetary economics , internal debt , economics , debt levels and flows , law , population , demography , sociology , nonprobability sampling , machine learning , computer science , political science
We examine how firms finance their investments, dividends, and profit shortfalls in different institutional environments. Using firm‐level data from 71 countries, we employ a dynamic multi‐equation system addressing the interdependence and intertemporal nature of financing decisions. We find that equity and long‐term debt (short‐term debt and cash) play a major role in financing capital expenditures (working asset investment). As the institutional environment strengthens, (i) firms increase (decrease) their reliance on equity (debt) issuance in financing capital expenditures, (ii) firms decrease their leverage, and (iii) they extend their debt maturity. We further report several findings on the effects of financial development.