Stochastic Uncertainty of Institutional Quality and the Corporate Capital Structure in the G8 and MENA Countries

Tarek Eldomiaty (), Islam Azzam, Jasmine Fouad, Hussein Mowafak Sadek and Marwa Anwar Sedik
Additional contact information
Tarek Eldomiaty: Onsi Sawiris School of Business, The American University in Cairo, AUC Avenue, P.O. Box 74, New Cairo 11835, Egypt
Islam Azzam: Onsi Sawiris School of Business, The American University in Cairo, AUC Avenue, P.O. Box 74, New Cairo 11835, Egypt
Jasmine Fouad: Onsi Sawiris School of Business, The American University in Cairo, AUC Avenue, P.O. Box 74, New Cairo 11835, Egypt
Hussein Mowafak Sadek: College of Management and Technology, Arab Academy for Science Technology and Maritime Transport, P.O. Box 2033, Cairo 11736, Egypt
Marwa Anwar Sedik: Faculty of Business and International Trade, Department of Finance, Misr International University, P.O. Box 1, Heliopolis, Cairo 11757, Egypt

Risks, 2025, vol. 13, issue 6, 1-20

Abstract: This paper examines the impacts of observed versus uncertain (stochastic) institutional quality of corporate debt financing. This paper compares the impacts of two distinct levels of institutional quality in developed and developing economies. World governance indicators (WGIs) are used as proxies for institutional quality. Stochastic Geometric Brownian Motion (GBM) is used to quantify the institutional uncertainty of WGIs. The results of GLS estimates using a sample of 309 nonfinancial listed firms in G8 countries and 373 nonfinancial listed firms in MENA countries covering the years 2016–2022 show (a) positive (negative) stochastic impacts of voice and accountability (government effectiveness and political stability) on debt financing in the G8 and MENA regions; (b) although potential improvements in institutional quality are shared concerns among G8 and MENA countries, the former outperforms the latter in terms of creditors’ contract protection and enforcement, paving the way for public policy makers in the MENA region to enhance regulations that protect debt contractual obligations; (c) macroeconomic variables have sporadic impacts; GDP growth is significant in G8 but not in MENA countries; (d) the negative impacts of inflation rates are consistent in both regions; and (e) unemployment plays a negative signaling role in the G8 region only. This paper contributes to the related literature by examining the uncertain impact of institutional quality on corporate debt financing. This paper offers implications for policy makers, directing them to focus on institutional endeavors in a way that helps companies secure the debt financing required to support investment growth.

Keywords: institutional quality; stochastic simulation; corporate capital structure; MENA; G8 (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2025
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