Macroeconomic development and capital structure decisions of firms: Evidence from emerging market economies

Purpose – The purpose of this study is to examine the effect of macroeconomic factors on capital structure decisions of emerging firms. Design/methodology/approach – A panel data covering a period from 1990 to 2006 for 34 emerging market countries were analyzed using the seemingly unrelated regression approach to mitigate the effects of multicollinearity and to test for the stability of parameter estimates across the countries. Findings – The results largely suggest that the effect of macroeconomic factors on capital structure varies with capital structure measurement variable in most cases. Bank credit is significant in predicting capital structure choices of firms. The findings of the research also indicate a significantly negative relationship between gross domestic product (GDP) per capita and capital structure choices. Inflation on the other hand positively influences the choice of short-term debt over equity. Stock market development is however insignificant in predicting capital structure decisions of firms and expectations of increasing interest rate positively influences firms to substitute long-term debt for short-term debt over equity. Most of the control variables namely asset tangibility, return on equity, return on assets and Tobin's Q were significant predictors of corporate financing. The results of the study generally supports existing literature on the impact of investment opportunity set, profitability, and stock market development, inflation, interest rate GDP per capita and bank credit on the capital structure decisions of firms. Originality/value – The main value of this paper is to analyze the effect of macroeconomic factors on the capital structure decisions of firms using large dataset from emerging countries.