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11. Explain whether international differences in financial leverage exist?

11. Explain whether international differences in financial leverage exist?

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Answer #1

While industry norms can say a lot about capital structure, other relevant variables such as taxation, regulation, bankruptcy costs, agency costs, and culture can vary widely across national borders.

Factors that help explain capital structure in an international environment:

  • Legal and Institutional Environment
  • Financial Markets and Banking System
  • Macroeconomic Climate

The table below summarizes how these factors may influence capital structure (not exhaustive).

FACTOR COUNTRY TRAIT FINANCIAL LEVERAGE IMPACT DEBT MATURITY
Court efficiency Highly efficient Lower Longer
Legal system Civil law Higher Shorter
Legal system Common law Lower Longer
Tax system Equity biased Lower N/A
Inflation High Lower Shorter
Institutional Investors (ex. pension funds) Many and well developed Lower Longer
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