Investor protection and capital structure: International evidence

Institutions, environments, and firm characteristics are important determinants of capital structure. From a sample of firms across 45 countries, we find that investor protection plays an important role in the determinants of capital structure: firms in countries with better creditor protection have higher leverage, while firms in countries where shareholder rights are better protected use more equity funds. The other differences in institutions and environments also explain the cross-sectional variation in the aggregate capital structure across counties. Furthermore, firm characteristics identified by previous studies, as correlated in a cross-section with capital structure in developed markets, are similarly correlated in the present sample of countries. The evidence presented herein indicates that institutional differences are as important as firm characteristics in determining capital structure. (C) 2006 Elsevier B.V. All rights reserved.