Determinants of Capital Structure: United Kingdom Versus Continental European Countries

In this paper, we analyze how country-specific differences influence capital structure indirectly through firm-specific variables. We apply a system Generalized Method of Moments technique to a panel data sample of companies from five countries (France, Germany, Italy, Spain and the United Kingdom) during the period 1998-2008. As the different financial systems of European economies (bank-oriented or market-oriented) may influence capital structure differently through firm-specific variables, we first examine the determinants of capital structure for each country separately and we then analyze whether the observed differences between the United Kingdom and the continental European countries are relevant. The results show that there are substantial differences in the capital structure choices of firms across five major European countries. These differences are motivated by the type of financial systems of the countries (bank-oriented and market-oriented) and influence the capital structure indirectly through the firm-specific variables. Overall, our results support the relevance of the differences in the capital structure choices of firms across five major European countries, and in particular, the singularity of the United Kingdom (a market-oriented economy) as opposed to continental European countries (bank-oriented economies).