Does Country-Level Uncertainty Avoidance Affect Capital Structure Decisions?

We evaluate the effect of country-level uncertainty avoidance on capital structure decisions. Our analysis reveals that uncertainty avoidance has a negative effect on long-term debt that is essentially offset by a positive effect on short-term debt, therefore resulting in a negligeable effect on total debt. However, we find that uncertainty avoidance has a significant moderating effect on the traditional firm-level determinants of capital structure. More specifically, it strengthens the positive influence of firm size, market-to-book, and asset tangibility. It also intensifies the negative influence of R&D intensity and corporate profitability on leverage. These results underline the cost of high uncertainty avoidance in hampering the debt financing of small growth firms with high R&D investments and few tangible assets to pledge as collateral