What Do We Know About Capital Structure? Some Evidence from International Data

Thirty six years and hundreds of papers aner Modigliani and Miller's seminal work, what do we really know about corporate capital structure choice? Theory has clearly made some progress on the subject. We now understand the most important departures from the Modigliani and Miller assumptions that make capital structure relevant to a firm's value. However, very little is known about the empirical relevance of the different theories. Empirical work has unearthed some stylized facts on capital structure choice, but this evidence is based on tirms in the United States alone, and it is not at all clear how these facts relate to different theoretical models. Without testing the robustness of these fmdings outside the environment in which they were uncovered, we cannot determine whether these empirical regularities are merely spurious correlations, let alone whether they support one theory or another. l'his paper attempts to start tilling this gap in our knowledge. Our primary objective is to establish whether the choice of capital structure in other countries is based on factors similar to those influencing capital structure of U.S. firms. In doing so. we do not restrict ourself to attempting to reproduce the regularities found in the U.S. in other countries, but we try to go deeper in understanding the theoretical rationale behind them. The use of international data provides an unique opportunity for this analysis. To the extent other countries are similar to the U.S.. they provide an independent sample to test the received wisdom. To the extent they have different institutional structures, they increase our ability to discriminate among alternative theories.