Quality of Public Governance and the Capital Structure of Nations and Firms
This paper examines the role of public governance quality in determining the composition of a country’s external liabilities and the capital structure of firms. In our theory, better institutional quality tends to promote a higher share of foreign direct investment and equity investment in total foreign liabilities, and a higher share of long-term debt within the debt/loan category. Similar prediction holds for the capital structure of firms. We conduct extensive empirical investigation by exploring both firm level data and country level data and find supportive evidence for these predictions.
We thank Patrick Bolton, Jun Qian, Neng Wang, Yinxi Xie, and participants at the Geneva Institute of International Studies conference, FISF workshop and CFA Annual Meeting for helpful comments. All errors are the authors’ responsibilities. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.