Firm leverage determinants of the role of market structure : BRICS vs. MINT
Musasiwa, Edmore Tinarwo
This paper contributes to the growing literature which examines the factors influencing financing decisions within corporates. Specifically, it investigates the effect of market structure on leverage in the BRICS and MINT economies. Both firm-level data from over 8100 listed companies and cross-country data of the BRICS and MINT economies, between 1994 and 2014, are used to examine the market structure and firm leverage nexus. Following previous work on the subject, panel data techniques are applied in assessing this relationship. We begin by reaffirming the importance of the traditional firm-specific factors on leverage in the BRICS and MINT blocs. The results suggest that, when using total leverage as a dependent variable, growth opportunities and liquidity emerge important in explaining leverage across both blocs. However, with long-term leverage as a dependent variable, tangibility is more significant, particularly, in the BRICS bloc. We note that growth opportunities maintain their importance across the two blocs in fostering leverage. Also, within the BRICS countries, the effect of profitability on leverage appears significant in India and South Africa. In the second phase of tests, macro variables are introduced. Across the two blocs, GDP and inflation effects are important in explaining the variation in leverage when total leverage and short-term leverage are dependent variables. In country regressions, both inflation and GDP present varied results. For instance, GDP seems to support higher leverage in the Chinese economy, while inflation negates debt financing in Russia and Nigeria. In the third phase, the effects of market structure on leverage are examined. The results suggest that more developed and balanced market structures have weak nexus with firm leverage. In line with a priori expectations, the MINT economies are relatively less developed and much of their variation in leverage is influenced by this slanted market structure. MINT firms prefer more bank debt due to the relative lack of depth in their capital markets. On the other hand, the BRICS countries have more developed capital markets which seem to weaken the relationship between market structure and corporate leverage. Finally, this relationship is tested across industry types. The results show that industry type is germane to the market structure and leverage relationship examination. Consequently, market structure influence becomes more varied across the blocs and the industry types. It is evident that the credit market is more important in supporting the variation in leverage within the MINT economies, particularly for consumer discretionary, financials, industrials and materials industry types. Within the BRICS bloc, capital markets are more significant in the communications and utilities sectors.
Corporations, Valuation, Finance, Corporate debt, BRIC countries - Economic conditions