| I report that most cross-sectional deviations in international capital structure are caused by the heterogeneities of firm-, industry, and country-specific determinants rather than by legal institutional differences such as legal environment. In particular, most variations in international capital structure originate in the heterogeneity of firm-specific characteristics. Collateral value of assets, firm size, and debt-related tax shield benefit are generally viewed as the most influential factors in determining corporate leverage decision. If the heterogeneities at the level of firm, industry, and country levels are accounted for, the English common-law countries surprisingly appear to rely highly on debt-leverage, whereas the German civil-law countries are likely to be least levered. This finding is contrary to a "received wisdom" associated with international capital structure. The heterogeneities appear to be related to a sample bias inherent in international databases. The stylized relationships between firm-specific determinants and leverage ratio obtained from cross-sectional data are not generalized across international capital structure over time. I also find significant difference in speed of convergence of actual capital structure toward target level across legal environments under a dynamic setting. Thus, legal factors seem to play a significant role in deciding the speed of adjustment in leverage. |
