Institutional Determinants of Equity Financing in Austria

This study examines which institutional determinants are chiefly responsible for the fact that the capital structure of Austrian companies is dominated by debt. An international comparison shows that company taxation is generally not financing-neutral and, given the observed differences in equity ratios between countries, cannot be the primary factor influencing capital structure choice. Instead, the nature of creditor protections, which determine the position of investors and lenders in the event of bankruptcy, is probably a far more decisive factor. Equity ratios decline in parallel with creditor-friendly provisions across countries. Because of the predominance of small and medium-sized enterprises (SMEs) in Austria, the Hausbank principle plays an important role in determining capital structure. The associated intensive exchange of information between banks and companies allows borrowings to take on the functions usually performed by equity. In the future, financial market innovations and the transfer of severance pay and pension entitlements to outside institutions could have an influence on capital structure.