Capital structures in developing countries : evidence from ten countries

The authors investigate capital structures in a sample of the largest publicly traded firms in ten developing countries - Brazil, India, Jordan, the Republic of Korea, Malaysia, Mexico, Pakistan, Thailand, Turkey, and Zimbabwe - for 1980 - 91. The firms in the sample are smaller than comparable U.S. firms, and the financial systems and regulations in these countries differ significantly from those in the United States. Not every country has well-functioning liquid financial markets in which investors can diversify risks. Nor do all countries have efficient legal systems in which a broad range of property rights can be enforced. Still, variables that predict capital structures in the United States also predict choices of capital structures in the countries sampled. Variables suggested by agency theory explain more of the variation than variables suggested by tax-based theories. For both short-term and long-term equations in most countries, the asset structure, liquidity, and industry effects have more explanatory power than firm size, growth opportunities, and tax effects. In several countries, total indebtedness is negatively related to net fixed assets, suggesting that markets for long-term debt do not function effectively.