The Impact of Institutional Environment in Firms' Capital Structure During the Recent Financial Crises

Abstract

This paper reviews the impact of environmental variables on firms' capital structure throughout the recent financial crises (dot.com bubble, subprime crisis, and European sovereign debt crisis). For the first time, the sovereign general gross debt and current account balance appear in the debate, revealing evidence that the sovereign's irrational exuberance of debt has been mimicked by firms. The proposed approach revealed two important trends, broadly consistent throughout those disturbed episodes. Under stress firms firstly increase leverage and rely, or are forced to rely, secondly on short-term borrowings, heightening rollover risks. Altogether, the pronounced outbreak of those crises had on its own the seeds of a new one. Regarding the European sovereign debt crisis, the presence of an asymmetric shock was noticed, with the periphery and the centre of the European Union being targeted with different magnitudes. Lastly, it is clear that environmental variables are key to this topic and should deserve a more careful analysis to improve the understanding of financing choices of firms. Even more in a case of a financial crisis... JEL Classification: G01, G30, G32