Influence of bank concentration and institutions on capital structure: New international evidence

This paper analyzes the effect of bank market concentration and institutions on capital structure in 39 countries. Results for 12,049 firms over 1995-2004 indicate that firm leverage increases with greater bank concentration and stronger protection of creditor rights, but drops with stronger protection of property rights. The results also indicate that greater bank concentration substitutes for creditor protection and asset tangibility to reduce the agency cost of debt between shareholders and debtholders. Weaker protection of property rights raises the agency cost of external funds, leading to the preferential use of internal funds as posited by the pecking order theory. The trade-off theory, however, is more valid in countries with stronger protection of property rights.