Saturday, 22 October 2011: 5:35 PM
We examine how asset structure is related to leverage in different
institutional environments, using tens of thousands of firm-level
observations from small, privately held, emerging market firms that
are likely to face financing constraints. Our empirical analysis
indicates that the linkage between asset tangibility (fixed assets as
a portion of total assets) and leverage (measured as long-term debt
over total assets) varies, such that in countries with fewer
restrictions on collateral (land transferability), the relationship
between these variables is much tighter. This also applies to the
linkage between tangibility and debt maturity structure (measured as
long-term debt over total debt). We find no evidence that our
findings are being driven by changing composition of firms over time,
or by different industry concentrations in various countries, and are
robust to using firm-level fixed effects specifications, to clustering
error terms at the country level, and to using an alternative proxy
for collateral law regime. Our results have clear implications for
policy-makers, and are consistent with an interpretation that firms
located in environments with less effective collateral regimes (here
proxied by restrictions on land transferability) are less able to take
advantage of the relationship between tangible assets and long-term
debt financing, inhibiting their ability to acquire debt financing.
institutional environments, using tens of thousands of firm-level
observations from small, privately held, emerging market firms that
are likely to face financing constraints. Our empirical analysis
indicates that the linkage between asset tangibility (fixed assets as
a portion of total assets) and leverage (measured as long-term debt
over total assets) varies, such that in countries with fewer
restrictions on collateral (land transferability), the relationship
between these variables is much tighter. This also applies to the
linkage between tangibility and debt maturity structure (measured as
long-term debt over total debt). We find no evidence that our
findings are being driven by changing composition of firms over time,
or by different industry concentrations in various countries, and are
robust to using firm-level fixed effects specifications, to clustering
error terms at the country level, and to using an alternative proxy
for collateral law regime. Our results have clear implications for
policy-makers, and are consistent with an interpretation that firms
located in environments with less effective collateral regimes (here
proxied by restrictions on land transferability) are less able to take
advantage of the relationship between tangible assets and long-term
debt financing, inhibiting their ability to acquire debt financing.