Capital Structure Determinants: Evidence from Developing Economies

Abstract

This study investigates the determinants of capital structure in developing economies by employing a mixed-methods approach that integrates firm-level econometric analysis with qualitative insights into institutional environments. Using panel data from non-financial firms across multiple emerging markets, the results reveal that both firm-specific variables—profitability, size, tangibility, growth opportunities, and liquidity—and macroeconomic conditions—such as inflation, GDP growth, and foreign direct investment—are central in shaping leverage decisions. The findings demonstrate that while traditional capital structure theories, including trade-off and pecking-order frameworks, retain explanatory relevance, they are insufficient to fully capture the institutional, regulatory, and behavioral complexities of developing markets.The study also highlights heterogeneity across firms, sectors, and countries. Larger firms, benefiting from reputational strength and access to long-term debt markets, generally maintain higher leverage, whereas smaller firms rely disproportionately on short-term borrowing and internal financing, reflecting the phenomenon of debt intolerance common in emerging economies. Peer and industry effects were found to further influence financing patterns, as firms often emulate the capital structure strategies of competitors. Moreover, capital structure choices in developing markets remain highly vulnerable to global financial cycles, interest rate fluctuations, and commodity trade volatility, underscoring the role of external shocks in shaping financing risk. Qualitative evidence complements these findings by showing how governance frameworks, institutional quality, and debt market inefficiencies shape firm-level behavior in ways that extend beyond quantitative projections.The study concludes that no single theory adequately explains capital structure in emerging economies. Instead, an integrative, context-sensitive framework is necessary—one that incorporates firm-level, macroeconomic, institutional, and behavioral dimensions. These insights offer valuable implications for policymakers aiming to strengthen financial systems, promote hybrid financing instruments, and enhance governance structures, while providing firms with guidance to strategically balance leverage and mitigate financing risks.