THE ROLE OF FINANCIAL DEVELOPMENT TOWARD CAPITAL STRUCTURE CHOICE UNDER DIFFERENT MACROECONOMIC CONDITION

Abstract

This study provides the new evidences of how financial development affects firm’s capital structure and also examines the role of financial development under different macroeconomic condition. This study employs firm-level data from high and low financial development countries that consist of financially unconstrained and constrained firms in year 2000 to 2010. Fixed effect panel regression models that firm’s capital structure is a function of macroeconomics condition and firm-specific variables are used. The results show that level of financial development affects firm’s leverage sensitivity to macroeconomic condition. We found both unconstrained and constrained firm leverage in high financial development are less sensitive to macroeconomic condition than firms in low financial development. We found constrained firms benefit more from well-functioning financial structure than unconstrained firm.