Capital structure and institutional status in the European Union

Alejandro Casino-Martínez (), Jose López-Gracia () and Reyes Mestre-Barberá ()
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Alejandro Casino-Martínez: University of Valencia
Jose López-Gracia: University of Valencia
Reyes Mestre-Barberá: University of Valencia

Empirica, 2025, vol. 52, issue 3, No 3, 457-492

Abstract: Abstract This study analyses the financing of firms in the EU countries during the 2010–2018 period from the perspective of the potential influence of the institutional environment. Our model includes not only country-specific but also firm-level and macroeconomic factors. We find that a significant portion of the variation in firms´ leverage is explained by institutional factors, both legal and financial. Moreover, our results reveal that capital structure, in terms of leverage, has an inverse relationship with the distance to (institutional) frontier score, suggesting the existence of an institutional gap in the EU. Regarding the economic impact of the institutional effects, four institutional factors can be highlighted as the most relevant: (i) the level of financial development, (ii) the concentration of the banking system, (iii) the strength of the legal system or economic freedom, and (iv) the degree of financial intermediation.

Keywords: Leverage; Institutional environment; Legal factors; Firm-level factors; Macroeconomic factors; Panel data methodology (search for similar items in EconPapers)
JEL-codes: C33 G32 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10663-025-09649-z

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