The impact of institutional environment on the capital structure of firms during recent financial crises

Paulo Alves and Paulo Francisco

The Quarterly Review of Economics and Finance, 2015, vol. 57, issue C, 129-146

Abstract: This paper reviews the impact of institutional variables on the capital structure of firms during the recent financial crises (dot.com bubble, subprime crisis, and European sovereign debt crisis). For the first time, the general government gross debt and current account balance are included in the debate, revealing evidence that the irrational exuberance of sovereign debt has been mimicked by firms. The approach proposed reveals two important trends, broadly consistent throughout those episodes of disturbance. Under stress, firms increase leverage and then rely, or are forced to rely, on short-term borrowing, heightening rollover risks. Altogether, the outbreak of those crises sowed the seeds of a new one. Regarding the European sovereign debt crisis, the presence of an asymmetric shock has been noted, with the periphery and the center of the European Union being targeted to different extents. Lastly, it is clear that institutional variables are key to this topic and deserve a more careful analysis if we are to improve our understanding of the financing options available to firms, especially in times of financial crisis.

Keywords: Capital structure; Financial crisis; Institutional environment (search for similar items in EconPapers)
JEL-codes: G01 G30 G32 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:57:y:2015:i:c:p:129-146

DOI: 10.1016/j.qref.2014.12.001

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