Regulatory Environment and Financial Constraints of Private Firms in the European Union

This study analyses the influence of the institutional environment on firms´ capital structure in the European Union (EU). Unlike other research papers, we focus on private firms and include data sourced from all countries belonging to the EU during the period 2010-2018. We split the sample into groups of small and large firms , which we consider financially constrained and unconstrained, respectively. Throughout the study, we posit that institutional effects on financing policies vary with size, with the effects being greater for constrained firms as they face more financing frictions. We run regression models also controlling for firm-level characteristics and relevant macroeconomic factors. Our findings reveal that a high-quality regulatory environment negatively affects firms’ leverage, whereas corruption in society has the opposite effect. Moreover, the efficiency of the enforcement of commercial contracts and the development of the financial system positively influence firms´ leverage