Changes in capital structure of listed emerging market firms in the aftermath of the 2007 – 2008 global financial crisis

An, Botao
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Southern New Hampshire University
The 2007 – 2008 global financial crisis led to one of the worst recessions in history and created enormous adverse impacts on global demand, equity and debt markets around the world. Globalization increases competition for emerging-market (EM) firms both inside and outside their domestic market. One of the key challenges that they have is how to finance their growth opportunities, especially under these adverse circumstances. The impacts on most developed-country (DC) firms were devastating while EM companies experienced different levels of effects due to the aftermath of the crisis. In this study, I explore how patterns of EM firms’ corporate financing decisions have changed in the aftermath of the global financial crisis. Using data from 10,860 listed firms from 22 emerging markets, which were classified by MSCI between 2000 and 2014, results show that EM listed firms with more growth options, have less profitability, larger size, more tangible assets, higher business risk, higher tax payments, higher degree of internationalization, can carry more debt. I then analyze the changing dynamic of EM listed firms’ leverage choices; results suggest capital structure determinants have different impacts on leverage prior to, during, and after global financial crisis. There is a delayed effect of impacts of the global financial crisis on EM firms’ leverage policy; creditors only took precautions on the adverse environment during the crisis period (2007 – 2009). Nevertheless, there is a changing pattern on EM firms’ capital structure determinants during recent decades. In the 1990s, EM firms’ debt usage decisions were dominated by institutional factors, and impacts of institutional factors on firms’ debt usages gradually transfer to firm-specific factors after the 1997 Asian financial crisis. Previous studies suggested EM firms’ leverage policies can be explained by the “pecking-order theory” and the “agency theory” before the 2007 – 2008 global financial crisis (Fan et al., 2014; Fernanedes, 2011). In this paper, I found that the “pecking-order theory” maintains its effectiveness in EM firms’ leverage policies, and the “trade-off theory” gradually shows its effectiveness throughout the sample period. Unlike EM firms in the whole sample, internationalized EM firms also follow different changing patterns in leverage policy determinants during the sample period, and they experienced the impact of the global financial crisis immediately. Due to additional risk exposure of internationalization, internationalized EM firms’ leverage policies show support to the “pecking-order theory,” but the “trade-off theory” and the “agency theory” are also supported in sub-sample periods. (Author abstract)