Institutional environment, capital structure, and firm value: Three essays with a global perspective

This thesis presents three essays related to international capital structure. In the first essay, we use a GMM estimator with adjustment to target debt ratios to examine the dynamics of capital structure for firms in 28 countries. We find a negative relationship between firms' debt ratios and a country's level of stock market development/liquidity, inflation, and the uncertainty avoidance index while a positive relationship is found between firms' debt ratios and a country's economic growth, corruption index, and banking development. Our results provide the evidence that lower information asymmetry attributed by better stock market development enhances the firm's ability to issue equity. Banks seem to provide more shorter-term loans. Lastly, firms in almost all countries are found to adjust their capital structures slowly to the target level.; The second essay explores how cross-border variations in institutional factors influence the role of debt and dividends in addressing agency problems. We investigate how firms in 24 countries use debt and dividends to mitigate agency costs of under- and over-investment for high- and low-growth firms to enhance firm value. We find that the value impact of debt depends on the availability of investment opportunities, while dividends do not seem to play a role in affecting firms' value. Consistent with our expectations, the direction and magnitude of the value impact of debt differs across our sample countries and these differences can be explained by level of severity of agency problems across country groups with different institutional structures.; The third essay examines how multinationals respond in 62 countries to host country tax, legal, financial, and economic structures by varying their affiliates' borrowing patterns. Our results support the theory that the multinationals hold high affiliate debt ratios in high tax countries. Affiliates in countries with high (low) credit availability, a high (low) corruption perception index, low (high) political risks and high (low) currency depreciation are found to carry high external (parent) debt ratios. Affiliates substitute external debt with parent debt in countries with poor institutional features showing the importance of internal capital markets in overcoming weak institutional environments and high interest costs.; This dissertation contributes to the literature as it deepens our understanding of the role of institutional structures on corporate capital structure decisions and the firm's value. The findings in this dissertation have important implications for managers, policy makers, and scholars interested in how firms in different countries behave differently in managing their financial structures with the goal of minimizing agency costs and maximizing firm value. These differences are mainly due to the institutional environment in which firms operate. With improvements in a country's legal system and the development and/or efficiency of security markets, firms can have better accessibility to financing sources and thereby become the significant factors in financial markets and in the economic development of a country.