Does Country-Level Uncertainty Avoidance Play a Role in Capital Structure Decisions?

We hypothesize that Hofstede’s uncertainty avoidance index has a moderating effect on the firm-level determinants of capital structure. Using a large panel of listed firms around the world, we show that uncertainty avoidance amplifies the positive impact of firm size and asset tangibility and compounds the negative influence of R&D intensity and profitability on leverage. More intriguing is the finding that higher market-to-book values are less detrimental to leverage the higher uncertainty avoidance is. These results are robust to alternative model specification and estimation methods. Furthermore, the effect on leverage appears to be sizable, which suggests that in high uncertainty avoidance societies, small firms with few tangible assets face serious impediments in their access to debt financing unless they also benefit from favorable market valuation ratios