Economic forecast and corporate leverage choices: The role of the institutional environment

Julio Pindado, Ignacio Requejo and Juan C. Rivera

International Review of Economics & Finance, 2017, vol. 51, issue C, 121-144

Abstract: We investigate how the expected performance of the economy affects corporate debt decisions using a broad sample of companies from developed and emerging economies. High transparency between lenders and borrowers and strong legal protection of the two parties involved in the lending relationship facilitate indebtedness. These characteristics simultaneously alleviate the pro-cyclical effect of the expected performance of the economy on debt. Conversely, inefficient insolvency regimes and high rates of default at a country level hamper corporate borrowing. In addition, firms' debt decisions are more sensitive to economic expectations in countries suffering these problems.

Keywords: Economic expectations; Capital structure; Transparency; Legal protection; Insolvency; Credit default (search for similar items in EconPapers)
JEL-codes: E44 G32 K29 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:51:y:2017:i:c:p:121-144

DOI: 10.1016/j.iref.2017.05.006

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