The Impact of Institutional Environment on the Capital Structure of Firms during Recent Financial Crises

This paper reviews the impact of institutional variables on the capital structure of firms throughout the recent financial crises (dot.com bubble, subprime crisis, and European sovereign debt crisis). For the first time, the sovereign general gross debt and current account balance have entered into the debate, evidencing that the sovereign's irrational exuberance of debt has been mimicked by firms. The proposed approach revealed two important trends, broadly consistent throughout those disturbed episodes. When under stress firms firstly increase leverage and rely, or are forced to rely, secondly on short-term borrowings, heightening rollover risks. Altogether, the pronounced outbreak of those crises sowed the seeds for a new one. After the earthquake of the European sovereign debt crisis, an asymmetric shock sent ripples of very different magnitudes across the periphery and the center of the European Union. Lastly, it is clear that institutional variables are key to this topic and should deserve a more careful analysis to enhance the understanding of the financing choices of firms. Even more so in case of a financial crisis