A.4.10 Buku Kumpulan Lagu Anak TK KB

The Journal of Financial Research. Vol. XXII, NO.2. Pages 161-187.
Summer 1999
HOW FIRM CHARACTERISTICS AFFECT CAPITAL STRUCTURE:

AN INTERNATIONAL COMPARISON
John K. Wald
Rutgers University
Abstract
In this empirical study I examine the factors correlated with capital

structure in France, Germany, Japan, the United Kingdom, and the United States.
Although mean leverage and many firm factors appear to be similar across
countries, some significant differences remain. Specifically, differences appear in
the correlation between long-term debt/asset ratios and the firms' riskiness,
profitability, size, and growth. These correlations may be explained by differences
in tax policies and agency problems, including differences in bankruptcy costs,
information asymmetries, and shareholder/creditor conflicts. The findings of this
study suggest links between varying choices in capital structure across countries
and legal and institutional differences.
I. Introduction
To determine how firms choose their financing, it is necessary to consider

the effect of tax policies, agency relations, and legal institutions on financing
decisions. In this paper I investigate the determinants ofcapital structure in France,
Germany, Japan, the United Kingdom, and the United States. I both confirm prior
findings using an alternative data set and extend the analysis using additional firm
characteristics such as earnings volatility, sales growth, and nondebt tax shields.
Recent work, particularly that by Rajan and Zingales (1995), attempts to
apply theories ofcapital structure to international data. This paper most differs from
Rajan and Zingales in that I closely examine firm characteristics that are not
similarly correlated with leverage across countries. These characteristics include
measures of firm size, risk, sales growth, and inventories. By focusing on these
differences, I can obtain a greater understanding of the relation between
institutional differences and capital structure.
This paper is a revised version of Chapter 2 of the author's dissertation from the University of
California, Berkeley. The author wishesto thank Michael Ash, Ash Bhagwat, Bronwyn Hall, Hayne Leland,
Oded Palmon, Krishna Pendakur, David Romer, an anonymous referee, and seminar participants at
Brandeis University and London Business School for comments on earlier drafts.
161
162 The Journal of Financial Research
International comparisons have some advantages over a single-country

analysis. A cross-country comparison can be used to suggest linkages between
institutional differences and empirical results about capital structure. This approach
may allow examination of one set of institutions against another. Institutions can
then be evaluated to see which factors inhibit or magnify particular agency
problems. Thus, although the discussion below begins with capital structure theory,
it builds a correspondence between legal and institutional differences in corporate
governance and capital markets. This progression, though preliminary, is
meaningful because the cross-country comparison provides variation across legal
institutions.
Specifically, I show that U.S. capital structures may be more sensitive to
default risk than Japanese financing. This observation implies that expected
bankruptcy or financial distress costs may be larger in the United States than in
Japan. Also, I find that firm size does not appear to be a determinant of capital
structure in France and Germany, whereas firm size is positively linked to debt
ratios in other countries. This invariance may suggest that the participation of banks
in firm governance is effective at reducing the control problems faced by large
French and German firms. Finally, high-growth firms in the United States use less
debt than high-growth firms in other countries. This difference appears to reflect
either potential conflicts between debtors and creditors in the United States or a
much cheaper U.S. source of venture capital.
II. Data and Methodology
Data
The 1993 Worldscope data set provides information on firms from
approximately forty countries. Worldscope provides annual balance sheet
information with five to ten years of history, primarily for public companies. The
total sample size is large, with over 3,300 firms covered for the United States alone.
The data set includes both reported variables, such as earnings, and constructed
variables, such as average sales growth over a five-year period. The data set
includes variables comparable to the Global Vantage international data.
Worldscope's aim is "to provide the data in a manner that allows maximum
comparability between one company and another, and between various reporting
regimes" (Worldscope/Disclosure Partners (1992). Worldscope therefore makes
several adjustments to the data to make the definitions more comparable to their
U.S. counterparts. The most relevant adjustments for this study are the changes to
total assets. These include deducting Treasury stock and long-term deferred taxes
from total assets in most countries. For some German companies, these adjustments
include subtracting losses for the year from assets and adding prepayments received
Firm Characteristics 163
to assets. Foreign currency translation is also adjusted for some of the French firms
in the sample. Rajan and Zingales (1995) suggest several additional corrections,
such as subtracting pension liabilities from total assets for German firms; however,
these corrections are not undertaken here.
The current analysis is restricted to France, Germany, Japan, the United
Kingdom, and the United States, the same countries studied by Rutterford (1985).
The analysis focuses on one year, either 1991 or 1992, depending on the most
recent update to Worldscope, which in turn depends on whether the company's
year-end is early or late in the calendar year. Firm records from five to ten years
before the current year are used to construct two of the independent variables,
profitability and risk, which are defined as the mean and variance of earnings/total
assets. The data set is restricted to observations that have all necessary variables
available. Furthermore, public utilities and finance companies are excluded. This
limits the data to 4,404 firms, of which 313 are French, 316 are German, 1,350 are
Japanese, 1,096 are U.K., and 1,329 are U.S. The final data set contains fewer U.S.
firms than the Global Vantage sample used by Rajan and Zingales (1995), but a
much larger sample of foreign firms. Table 1 provides means, medians, and
standard deviations of the book values analyzed on a country-by-country basis.
Analysis of the individual firm data from Worldscope supports Rajan and
Zingales's (1995) conclusions that leverage is more similar across countries than
was previously believed, and that German and U.K. firms appear to use less debt
than firms in other countries. Rajan and Zingales report both med ian debt/total asset
ratio and adjusted debt/total assets. I Their U.S. sample of firms has a median
debt/total asset ratio of.27 for the United States, and an adjusted ratio of .25. Their
U.K. sample has a debt/total asset ratio of .18, and an adjusted ratio of .10. In
comparison, with a larger U.K. data set, Table 1 gives median debt/total assets of
.23 and .16 for the United States and the United Kingdom, respectively. The
difference from Rajan and Zingales's results is probably due to the larger
international sample examined above. As in their analysis, accounting differences
may cause some of the differences in leverage, but no easy correction exists for
many accounting problems.
Many other variables in Table 1 are broadly similar across countries, with
some minor differences. The measure of risk in my sample, the standard deviation
of first differences in earnings before interest and taxes (EBIT) divided by assets,
suggests more volatile earnings in the United States and the United Kingdom. This
difference may be due to less discretion in how earnings are reported, or to less
diversified firms in the United States and the United Kingdom. While research and
I Rajan and Zingales (1995) define adjusted debt as the book value of debt less the value of cash and
marketable securities, and adjusted assets as total assets less cash and short-term securities. less pension
liabilities for German firms, less intangibles.
TABLE I. Means, Medians, and Standard Deviations.
Variable U.S. Japan U.K. Germany France
Long debt/assets .185 .155 .098 .088 .145

Median .167 .144 .064 .061 .138
Standard deviation (.159) (.113 ) (.107) (.094) (.101)
Total debt/assets .234 .237 .169 .149 .237

Median .226 .216 .159 .126 .225
Standard dev iation (.151) (.141) (.112) (.126) (.120)
Risk .073 .022 .060 038 .037

Median .042 .014 .034 .025 .023
Standard deviation (.119) (.035) (.089) (.060) (.048)
PP&E/assets .350 .287 .385 .311 .241

Median .306 .277 .359 .285 .219
Inventories/assets .170 .139 .189 .246 .187

Median .143 .118 .173 .241 .184
Standard deviation (.150) (.102) (.154) (.141 ) (.121)
R&D/sales 5.784 1.000 .638 1.387 .579

Percent> 0 43% 41% 28% 19% 17%
Standard deviation (92.071 ) (2.176) ( 1.870) (4.641) (1.861 )
Depreciation/assets .309 .279 .226 .578 .252

Median .257 .251 .168 .515 .230
Standard deviation (.271) (.200) (.168) (.415) (.181 )
Profitability .071 .053 .087 .057 .072

Median .073 .049 .086 .049 .067
Growth-Five-year avg. .081 .066 .095 .085 .121

Median .062 .062 .065 .(m .184
Size-IOOOs US$" 2,416,298 3,032,182 875.946 2.523.340 2,635,876

Median 309.588 802,141 76.382 525,703 443,548
Standard deviation (10,836.300) (8,439,678) (3,627.475) (6,806,290) (6,096,017)
No. of sample firms 1.329 1,350 1.096 316 313
Note: The size variable reported here is total assets in thousands of U.S. dollars. whereas the actual measure
of size used in the regressions is In(total assets).
development (R&D) is generally an expense in each country, R&D as a fraction of

sales is much larger in the United States than in the other countries, This difference
is primarily due to a small number of U.S. firms with low sales and high R&D.
Some differences may also be due to which firms report their R&D and which firms
made it into this sample. As Table 1 shows, U.S. and Japanese firms are much more
likely to report R&D expenditures (see Bhagat and Welch (1995) for a cross-
country analysis of R&D). Property, plant, and equipment (PP&E) as a fraction of
assets; inventories as a fraction of assets; depreciation; profitability; and sales
growth are all roughly similar across countries. French firms experienced higher
growth as a group over 1986-91. Since much of the following analysis focuses on
within-country regressions, many country-specific differences may be less
important in determining the coefficients for each country.
Methodology
Two methodologies are commonly used in analyses of capital structure. In
the first, probits are performed to examine a firm's decision whether to issue debt
or equity given that it issues a new security (Marsh (1982), MacKie-Mason (1990)).
In the second, debt/asset ratios are regressed on the determinants ofcapital structure
(Bradley, Jarrell, and Kim (1984), Friend and Lang (1988)). I use a modified
version of the second method, primarily because of limitations in the data set. As
shown below, the results of the two methods are similar for the United States.
The method used below is different from most standard regressions in that
I use a heteroskedastic tobit estimator instead of astandard linear regression.' I use
this regression method because the dependent variable, the debt/asset ratio, is
censored at zero, and because the variance of the error term exhibits a wide degree
of heteroskedasticity, which can be explained by a function of the independent
variables. I therefore use a tobit maximum likelihood estimator with an exponential
error variance. This error specification is convenient, since the predicted variances
are forced to be positive, and it provides a reasonably good fit. Likelihood ratio
tests comparing the heteroskedastic tobit against a regu lar tobit reject the hypothesis
of homoskedasticity at the 1 percent level for every country. Performing regular
tobit if the errors are heteroskedastic will produce inconsistent estimates (Maddala
(1983)). Table 1A in the Appendix compares the results of several estimation
methods for the United States. Although the signs of the coefficients are invariant
across estimation methods for the United States, the coefficients are noticeably
different with different estimation methods.
2The log likelihood for the heteroskedastic tobit is:
In L = --1
2
L
y, > o
l
In«exp(Zy»2) (y '-
+ - - XB)j
exp(Zy)
- + L
Y,"o
In[
1 -(
cI> - XB-)] .
exp(Zy)
X includes a constant, risk, PP&E, inventories, R&D, depreciation, profitability, sales growth, and size. Z
includes the same variables, but substitutes asset growth for sales growth.
I use the ratio of long-term debt to book value of assets for my dependent
variable since it provides the most stable measure of a firm's capital structure.
Long-term debt is issued infrequently and thus may measure a more long-run
relation. Total debt/asset ratios may also be more sensitive to unobserved financial
crises, whereas long-term ratios will change less if the firm suffers heavy losses.
The infrequent change in long-term debt/asset ratios implies the firm's optimal
capital structure would be measured with error, but this error in the dependent
variable should not bias the estimated coefficients. Table 2A in the Appendix
includes regressions with the total debt/asset ratio as the dependent variable. I
discuss these coefficients in the cases where they produce noticeably different
results.
The independent variables include several ratios from the firms' balance
and income statements that proxy for financial distress costs, moral hazard, tax
deductions, profitability, growth, and size effects. These issues are addressed
individually below.
Factors Affecting Debt/Asset Ratio Analysis

Before presenting the analysis, I offer a few caveats about the use of
debt/asset ratios. First, accounting standards differ between countries, which
potentially undercuts the comparability of cross-country results. Second, a linear
specification may not be consistent with a particular theory of optimal capital
structure. Third, the variables chosen may be arbitrary or lack some essential
determining factor. Although Rajan and Zingales (1995) and Bhagat and Welch
(1995) address these issues, more discussion on these points is needed.
Even with Worldscope ' s efforts at uniform variable definitions, accounting
standards cause some differences to persist. Yet, for the by-country regressions on
which I focus, such differences may prove unimportant. Accounting differences
cause two types of problems: mismeasurement of long-term debt and
m ismeasurement of total assets. When examining regressions by country, neither
of these differences should greatly change the overall relevance of the results. If
accounting and institutional differences cause all firms in a certain country to report
some constant multiple of their actual assets, these differences will wash out. Since
total assets appears in the denominator of both the dependent and independent
variables, a proportional scaling for all firms in anyone country will not affect the
estimated slope coefficients. Put another way, dividing any equation by a constant
does not change the estimated betas.
The largest noncomparability in the data is the German definition of long-
term debt. German accounting standards define "long term" as being over four
years, while other countries define "long term" as being over one year only. Thus,
according to the long-term debt/asset ratios in Table 1, Germany exhibits less long-
term debt than the other countries.
As a final qualifying factor, the Worldscope data may not be a

representative sample offirms. However, as long as the selection process used by
Worldscope in choosing firms is independent of the long-term debt/asset ratio, any
random sample of firms provides a satisfactory pool for analysis. Since the
selection criteria include high visibility, inclusion in a country index, or request by
clients (Worldscope/Disclosure Partners (1992», no obvious selection bias exists.
MacKie-Mason (1990) argues that many of the determinants of capital
structure will be most visible at the margin. MacKie-Mason circumvents many of
the misspecification issues by performing a probit on whether a firm chooses to
issue debt or equity given that it issues a new security. While his method may be
preferable for detecting the marginal effect ofthese variables, the regressions below
show that even with potential biases and misspecifications, the U.S. coefficients
produced here have the same signs as those analyzed by MacKie-Mason. Thus,
while a bias or misspecification problem may exist, it is not severe enough to
change the signs of the U.S. regression. The coefficients on risk, net PP&E ratios,
and profitability for the United States also agree with other studies, such as that by
Friend and Lang (1988), that use regressions to analyze U.S. capital structure.
Moreover, even if a bias exists with a linear specification, a cross-country
comparison is still useful as long as this bias does not vary across countries.
Although the technique applied should be efficient given the hypothesized
structure of the problem, the results are relatively insensitive to specification. For
instance, an ordinary least squares regression on the U.S. data produces similar
coefficients. If the results were primarily driven by outliers, a least absolute
deviations regression would be more appropriate. However, as Table 1A shows,
least absolute deviations regressions produce roughly similar coefficients. This
insensitivity to specification suggests the results are relatively robust.
When deciding on the final specification, I included several alternative
variables in earlier regressions. Some potentially useful independent variables, such
as advertising expenses, were not available in the Worldscope data set, but various
other variables were tested and found to have no effect on the results.' Other
variables, such as such as Altman's (1968) constructed bankruptcy predictor
ZPROB, which is used by MacKie-Mason (1990), may not have the same meaning
for different countries.
In addition to the variables already described, I performed the same
regressions using dummy variables for industries. Although the dummy variables
were often significant, the final results were almost identical to those reported
'The variables I tested in the regression that were insignificant for all countries were total investments
divided by total assets, asset growth in the last year, standard deviation of percent changes in EBIT, and
minority interest. Asset growth was significant in the variance equations and is therefore included in the
heteroskedasticity calculations.
TABLE 2. Primary Effect ofScveral Capital Structure Theories on Predicted Coefficients.
Unchecked
Costs of Nondebt Jensen's Myers's Management
Financial Moral Tax Free Pecking Under- Decreases
Distress Hazard Shields Cash Flow Order investment Risk
Risk
PP&E + +
Inventories +
R&D
Depreciation
Profitability +
Sales growth
Size
without industry dummies. The only change in sign was for risk in Germany, which
goes from an insignificant positive coefficient to an insignificant negative
coefficient. Industry dumm ies caused no noticeable changes in significance for any
other variables in the cross-country regressions.
III. Theories of Capital Structure and U.S. Regressions
Before presenting the cross-country comparisons, I review the results for

the United States and discuss how the results fit into both the theoretical literature
and prior empirical work. Table 2 presents the predicted effect of several capital
structure hypotheses on how the right-hand side variables will affect capital
structure. Table 2 provides the primary effects commonly associated with these
theories and is not meant to be an exhaustive survey of either theories or their
possible effects.
Table 3 gives the regression results for the United States. The first column
presents the signs predicted by the theories reviewed in Table 2. The second column
presents the estimated coefficients, with beta parameters equivalent to the regular
coefficients from a linear regression. The third column presents the percentage
point change in the long-term debt/asset ratio for a one-standard-deviation increase
in the independent variable, all else equal.
Below the beta parameters, I present the variance parameters (y's)
estimated in the heteroskedasticity specification. In the likelihood function, the
variance, 0 2, is an exponential function of the independent variables, defined by
2
0 = exp(Zy). These fitted y parameters are reported in Table 3. Thus, the negative
TABLE 3. Heteroskedastic Tobit Regression for the United States.
Change in Long-Term Debt/Asset for One-

Parameter Predicted Sign Estimate Std.-Dev. Increase in Independent Variable
Beta parameters
Constant .023
(.037)
Risk -.251
(.090) -.030
PP&E + .269
(.024) .058
Inventories + .078
(.028) .012
R&D -.087
(.015) -.080
Depreciation -.103
(.024) -028
Profitability -/+ -1.154
(.082) -.096
Sales growth -.186
(.031) -.027
Size 1.513
(.247) .028
y parameters
Constant 7.958
(.400)
Risk 1.259
(.549)
PP&E .173
(.202)
Inventories -.746
(.281)
R&D -.011
(.004)
Depreciation .055
(.112)
Profitability -2.265
(.724)
Asset growth -.003
(.002)
Size -.185
(.028)
No. of observations 1,329

% Long debt/asset> 0 87.66
Note: Dependent variable is (long-term debt)/(total assets). Standard errors are in parentheses.
coefficient on size in the variance specification implies larger firms fit the linear
function more closely. If there exists an optimal debt/asset ratio for each firm,
larger firms would be expected to meet this target more easily than smaller firms.
The other variance parameters can be interpreted similarly, although I focus the
analysis below on the beta parameters.
Costs of Financial Distress

Several studies show that a unique debt/equity ratio exists if bankruptcy
costs are not zero (e.g., Scott (1976), Kim (1978)). These bankruptcy costs are
losses the firm faces either when it cannot pay creditors or when it is close to being
unable to pay them, but they are specific to debt financing. In a model where
bankruptcy is costless, the variance of earnings does not affect the debt/equity ratio
(Scott (1976), Castanias (1983». Without bankruptcy costs, firms issue debt with
a higher interest rate, but high interest rates do not limit debt issuance. With posi-
tive bankruptcy costs, a larger variance in earnings implies a lower debt/asset ratio
as long as the overall probability of bankruptcy is small. When bankruptcy costs are
larger, an increase in earnings variance decreases debt/asset ratios more. Thus, a
negative coefficient on earnings variance may indicate the existence of bankruptcy
or financial distress costs, and the magnitude of this coefficient measures the
importance of bankruptcy costs in determining an optimal capital structure.
Many prior regressions find a significantly negative coefficient on risk
when measuring debt/asset ratios (e.g., Bradley, Jarrell, and Kim (1984), MacKie-
Mason (1990)). I use the standard deviation of the first differences in the ratio of
EBIT divided by total assets as my measure of risk. This risk variable also produces
a significantly negative coefficient on debt/asset ratios for the United States. This
coefficient, - .251, implies that a one-standard-deviation increase in risk causes a
3 percent decrease in the long-term debt/asset ratio.
Moral Hazard
A second set ofvariables can be considered proxies for the amount of mora I
hazard faced by the firm's creditors. Jensen and Meckling (1976) present a model
in which firms take greater risks after issuing debt to switch possible gains from
debtholders to equityholders. Myers (1977) presents a model in which outstanding
debt causes underinvestment in future opportunities. If the firm has capital
entrenched in physical plant, the potential for underinvestment or excessive risk
taking by management is reduced. Thus, measures of physical plant are expected
to increase the debt/asset ratio of a firm. Symmetrically, firms' expenses on
intellectual goods, such as R&D, are expected to decrease the debt/asset ratio.
Titman (1984) describes a model in which greater firm specificity reduces
debt/asset ratios. R&D could also serve as a proxy for firm specificity. Finally,
R&D expenses may carry additional tax deductions, as discussed below.
However, these measures of physical assets either may show creditors that
the firm's assets are productively employed, or they may decrease the loss of assets
given default. That is, if much of the firm's value comes from specific human
capital, a larger loss may occur in bankruptcy than if the firm has many physical
assets. The importance of these moral hazards could come from either a signaling
model or a model with bankruptcy costs. Together, these effects can be described
as providing collateral security for debt issuance.
The three variables considered under moral hazard are the ratio of net
PP&E to total assets; the ratio of inventories to total assets; and the ratio of R&D
expenses to sales. All three of these variables have the expected sign and are
significant in the United States. These results agree with work by MacKie-Mason
(1990) and Friend and Lang (1988). The R&D coefficient has the largest effect on
debt/asset ratios of these three measures, with a one standard deviation in R&D
causing a decline of 8 percent in the long-term debt/asset ratio.
Nondebt Tax Shields
DeAngelo and Masulis (1980) show how firms with greater nondebt tax
deductions issue less debt. These firms have less need for the tax deductions
provided by debt, and thus issue less debt relative to equity. Bradley, Jarrell, and
Kim (1984) find a positive coefficient on depreciation, while MacKie-Mason
(1990) finds a negative coefficient.
I measure depreciation by the ratio of depreciation to total assets and find
a significantly negative coefficient. Bradley, Jarrell, and Kim's (1984) results are
probably caused by not including the amount of physical plant in their regressions.
Physical plant has moral hazard effects that are positively correlated with debt/asset
ratios, while tax shields are negatively correlated with debt/asset ratios. Since these
two independent variables are highly correlated, both need to be included in the
regression to segregate their effects. When I drop phys ical plant from the regression
reported in Table 3, I also estimate a positive coefficient on depreciation.
The size of the depreciation effect is also worth noting. A one-standard-
deviation change in the amount of depreciation a firm reports leads to only a 2.8
percent decrease in long-term debt/asset ratios, but the amount of depreciation
varies greatly between firms (the standard deviation is equal to the mean in Table
1). This measurable tax benefit to firms, which for the United States is in the
billions ofdollars, has a smaller effect on debt/asset ratios than the agency problems
represented by other variables. This suggests the total cost ofthese agency problems
may be large.
Profitability
Jensen (1986) and Williamson (1988) describe debt as a bonding or
discipline device to ensure that managers payout profits rather than build empires.
In Jensen's model, companies with free cash flow, or high profitability, will be
most subject to takeover and increased leverage. Thus, once these takeovers have
occurred, more profitable firms will have higher debt/asset ratios. Alternatively, the
pecking order hypothesis of Myers and Majluf (1984) states that information
asymmetries cause firms to prefer internal financing when it is available. Under
Myers and Majlufs model, more profitable firms will have lower debt/asset ratios.
A third possibility is that firms with good investment opportunities are both more
profitable and use a lower debt/asset ratio. Since I partially control for investment
opportunities with the growth variable, this explanation seems less likely.
Several researchers test the effects of profitability on firm leverage,
including Friend and Lang (1988) and Kester (1986), who find a significantly
negative relation between profitability and debt/asset ratios. The measure of
profitability used in the regressions below is EBIT divided by total assets. I also
find a significantly negative relation, and, as noted by Kester (1986), I find that
profitability has the largest single effect on debt/asset ratios. A one-standard-
deviation increase in profitability is correlated with a 9.6 percent decrease in long-
term debt/asset ratios."
Growth
Another factor affecting capital structure is future growth opportunities.
High-growth firms may hold more options for future investment than low-growth
firms as described by Myers (1977). Iffirms with what Myers terms "real options"
decide to issue debt, they may decide not to maximize firm value because such a
decision decreases the value for shareholders. That is, if some future date exists
when an additional equity investment is necessary to exercise an option, a firm with
outstanding debt may forego this opportunity because such an investment
effectively transfers wealth from stockholders to debtholders. Firms do not exercise
this option even though the investment has a net positive value. Thus, U.S. firms
with high-growth opportunities, such as high-tech firms, may choose not to issue
debt and thereby avoid this agency problem.
I include a five-year average of sales growth to test what effect growth has
on debt/asset ratios. According to the option model of Myers (1977) and the
'Marsh (1982) explains that more profitable firms at first increase current assets more than fixed
assets. Alternatively, he suggests that high-growth or high-profitability firms also have more risk. Since
I control for both fixed assets and risk. the theory that these variables are primarily significant because of
their positive correlation with unobserved risk or asset composition characteristics is less likely.
pecking order hypothesis of Myers and Majluf(l984), firms with high sales growth
should use less debt for financing, and, in fact, the coefficient on growth ( - .186) is
significantly negative.
Size
Larger firms may be able to reduce the transaction costs associated with
long-term debt issuance. Public corporate debt usually trades in large blocks
relative to the size of an equity trade, and most issues are at least 100 million
dollars in face value to provide liquidity. Larger firms may also have a better
chance of attracting a debt analyst to provide information to the public about the
issue. Another possibility is that larger firms have more dilute ownership, and thus
less control over managers. Managers may then issue less debt to decrease the risks
of bankruptcy that involve personal loss (see Friend and Lang (1988) and Friend
and Hasbrouck (1988».
Marsh's (1982) survey of the literature concludes that large firms more
often choose long-term debt while small firms choose short-term debt. Other studies
such as Friend and Lang (1988) find the effects mixed. I proxy for firm size with
In(total assets). The size coefficient for the United States (1.513) is significant and
positive.
IV. Cross-Country Comparisons
Since the regression for the United States agrees in sign with several prior
works and with accepted theory, I use the heteroskedastic tobit methodology to
compare the U.S. regression with regressions for other countries. Table 4 provides
regressions on long-term debt/asset ratios using the income and balance sheet
variables described above for five countries in the 1991-92 fiscal year. The
regression specified by each column is the same as that described for the United
States, and the coefficients reported are the beta parameters. The column for the
United States is identical to that given in Table 3. These results are examined
according to theory, or set of theories, just as the U.S. results are considered above.
Several researchers consider international capital structure, but generally
with a narrower focus. Most recently, Rajan and Zingales (1995) perform a similar
set of regressions for the G-7 countries using the Global Vantage data set and a
smaller group of right-han d-side variables. Some oftheir results are similar to those
in my regressions and are mentioned below. Prowse (1990) performs regressions
on U.S. and Japanese firms to explain differences in shareholder-creditor conflicts.
Kester (1986) performs a regression on U.S. and Japanese firms, but he performs
a single regression with U.S. and Japanese companies and a country dummy,
thereby forcing the coefficients to have the same value. Nakamura and Nakamura
TABLE 4. Heteroskedastic Tobit Regressions for Five Countries.
Parameter Predicted Sign U.S. Japan U.K. Germany France
Risk ~.251 .335 .152 -.034 .120

(.090) (.188) (.063 ) (.193) (.155)
PP&E + .269 .346 .152 .307 .318
(.024 ) (.026) (.022) (.043 ) (.054 )
Inventories + .078 -.079 .013 .053 -.041
(.028) (.023) (.025) (.041) (.041 )
R&D -.087 -.054 -.012 -.114 -.332
(.015) (.099) (.125) (.060) (.243)
Depreciation -.103 -.056 -.082 -.044 -.116
(.024) (.016) (.019) (.015) (.038)
Profitability -/+ -1.154 -1.694 -.276 -.275 -.473
(.082) (.130) (.051 ) (.136) (.122)
Sales growth -.186 .130 .050 .151 .115
(.031 ) (.044) (.021 ) (.051 ) (.033)
Size 1.513 2.029 1.736 -.325 .222
(.247) (.206) (.202) (.314) (.335)
No. of observations 1,329 1,350 1.096 316 313

%obs > 0 87.66 95.48 86.50 87.02 98.40
Log likelihood -4935.29 -4751.48 -3669.56 -1003.53 -1103.35
Homoskedastic LLK -4996.75 -4817.91 -3710.70 -1028.21 -1121.18
Note: A constant, risk, PP&E, inventories, R&D, depreciation, profitability. asset growth, and size are used
in the heteroskedasticity specification. The dependent variable is (long-term debt)/(total assets). Standard
errors are in parentheses.
(1982) compare U.S. and Japanese capital structure focusing on the cost of equity
as a way of explaining higher Japanese debt ratios. Toy, Stonehill, Remmers, and
Beekhuisen (1974) perform a set of regressions on firms in France, Holland, Japan,
Norway, and the United States. Their data set, however, is small, they use only
three independent variables, and their equations have low explanatory power. Marsh
(1982) uses the same probit method as MacKie-Mason (1990) on a U.K. data set,
but with a smaller set of explanatory variables. The results of these studies are
contrasted below with the regressions in Table 4 where similar independent
variables are used.
Costs ofFinancial Distress

The sign for the risk proxy does not agree with a standard theory of
bankruptcy costs for Japan, the United Kingdom, or France. Figure I charts long-
term debt by risk decile for each of the five countries. Although long-term debt
decreases smoothly by risk decile for the United States, a similar pattern does not
appear for the other countries and is not present in the coefficients in Table 4. Firms
with a larger variance of earnings should, all else equal, have a larger probability
25...---------------------------,
20
----------a
'" -+-USA
'-.- "-"
,··.··UK
.' , "''''. .... .x.;
j_.)t-. Germany
:~France
...._.-:~~..,,<.'.: ....'
',.:'
~-. - . - o)t. - ' - ,:"",,:--:.~ , '. ,..
<:
.... . «
"
5
',,' '
o~-~---------<--_--~-_- ___'
1 5 6 6 10
RlokDocIle
Figure I. Long-Term Debt/Asset Ratio by Risk Decile.
ofgoing bankrupt and should therefore use less debt. In actuality, they appear to use
more debt in several countries. Specifically, the coefficient for France is positive
but insignificant at .120, but larger and significant in the United Kingdom at .152,
and even larger in Japan at .335. Moreover, the standard errors on these coefficients
are small enough so that these results are not simply due to small sample size and
large errors. Although many large-sample studies, and particularly those that try to
avoid bias by probit analysis, find the expected effect of a decrease in debt for risky
firms, several studies, including Kim and Sorensen (1986), Toy, Stonehill,
Remmers, and Beekhuisen (1974), and Auerbach (1985), have the opposite sign on
their risk measure. Toy, Stonehill, Remmers, and Beekhuisen (1974) find a
significantly positive effect ofearnings volatility for Norway, the United States, and
Japan, while Kim and Sorensen (1986) and Auerbach (1985) examine only U.S.
firms. Even MacKie-Mason's (1990) probit analysis finds that one of the four
measures of volatility has a positive effect on debt issuance. Some of these results
may be due to a high correlation between risk and some excluded variable, such as
PP&E. This would not, however, explain why countries other than the United States
have a positive coefficient in this study.
This puzzle suggests three possible solutions. First, an omitted variable
might be causing these results. If some important variable, or set of variables, exists
that belong in this regression for the four non-U.S. countries, this could bias the
results. One possibility is that in Japan, firms that are in a more risky business join
a keiretsu, or Japanese industrial group, and thus avoid some of the problems of
financial distress and issue more debt. These firms would then cause the coefficient
on risk to appear positive for Japan. Prowse's (1990) regressions for Japan include
only firms that have joined a keiretsu. He finds a negative coefficient on risk for
Japan, suggesting this excluded variable may be the cause of the bias.
Another way to see this excluded variable problem is by considering the
regression on total, rather than long-term, debt given in Table 2A. For every
country besides France (where the estimated parameter is not significantly different
from zero), the coefficient on risk becomes more positive, but the explanation is
simple. Firms experiencing financial difficulties suffer from high earnings volatility
while their asset values decline and their total debt burden rises. Thus, firms
undergoing a financial crisis significantly bias the results toward a positive
coefficient.
A second possibility is reverse causation between risk and the long-term
debt/asset variable. This story may resemble one told by Jensen and Meckling
(1976), where managers of firms that have long-term debt choose the most risky
investments to shift value from creditors to shareholders. Possibly other countries
with more lax reporting standards would be more likely to suffer from this agency
problem. However, the greater managerial control exercised by main banks in
Japan, Germany, and France makes the scenario of increased contlict between
managers and creditors an unlikely explanation for these countries.
A third possibility for this anomalous finding is that the coefficient on risk
should be positive for those countries. In this case, firms that encounter a risky
business climate in France and Japan seek new investment in the form of debt and
can secure it. In this case, financial distress may not be a problem because a small
number of large bank creditors provide an easy transference of control in the case
of bankruptcy. Volatility in earnings may instead be correlated with company or
industry restructuring, and debt may be a less expensive way ofobtaining new long-
term financing. While this interpretation may work for France and Japan, the
industrial structure in the United Kingdom makes this explanation unlikely.
Given the limitations of this study, there is no way to choose among these
three possibilities. It seems safe to say, however, that if bankruptcy costs are a
prime determ inant ofcapital structure in the United States, they are less so for other
countries such as Japan and the United Kingdom. Whether this is because oflower
financial distress costs as found by Hoshi, Kashyap, and Scharfstein (1990) in
Japan, or because of some other agency problem that is more important in these
countries and is correlated with risk, is impossible to determine from this data set.
Moral Hazard
The signs on net PP&E are positive for every country regression and are
similar in magnitude. The most interesting deviation is in the United Kingdom,
where the coefficient (.152) is considerably smaller than in the four other countries.
A one-standard-deviation increase in PP&E in the United Kingdom causes a 3.2
percent increase in the debt/asset ratio, whereas a one-standard-deviation increase

in the United States causes a 5.8 percent increase. Although this may indicate that
U.K. capital markets are effective at reducing moral hazard, studies of Victorian
England, such as that by Kennedy (1987), argue that U.K. capital institutions were
particularly unsuccessful. Black and Coffee (1994) describe current U.K. capital
institutions as being similar to their U.S. counterparts, with fewer restrictions on
shareholders and more active shareholder groups. Alternatively, the low coefficient
on PP&E for the United Kingdom could be ascribed to a reverse causation
argument. That is, managers in the United Kingdom may not be as effective at
investing borrowed funds in physical plant as managers in other countries.
The coefficients on PP&E are largest in Japan, which is a result duplicated
by Rajan and Zingales (1995). Prowse (1990) instead finds a smaller effect for his
measures of tangible assets among Japanese firms than U.S. firms; however, his
Japanese sample is restricted to manufacturing firms that are members ofa keiretsu.
Prowse's explanation for the difference in coefficients on tangible assets focuses
on the reduced conflict between shareholders and creditors, which is how I explain
differences in coefficients on growth (see below). While Prowse and I explain our
findings with similar hypotheses, Prowse's small coefficients on PP&E do not hold
for this data set.
Whereas for the United States, profitabil ity and R&D have the largest effect
on long-term debt/asset ratios, for the other four countries, PP&E has the largest
effect on the debt/asset ratio. This difference is due in part to a larger coefficient on
profitability in the United States than in other countries, but it is due in larger part
to a greater standard deviation for the independent variables in the United States.
This suggests that U.S. firms may sort themselves by type or be less diversified, at
least for the Worldscope sample.
The coefficients on inventories reveal a significantly positive sign in the
United States and a significantly negative sign in Japan. Inventory is positively
correlated with total debt in Japan, but inventories are more often backed by short-
term debt. This relation suggests that the Japanese industries' practice of term
matching of assets and liabilities reduces the moral hazard concerns. By linking the
maturity of assets and liabilities, creditors are assured that funds are being used
productively and cash borrowed to finance inventories cannot be diverted to more
risky long-term projects. In contrast, U.S. firms either have other moral hazard
problems, or the reduction of financial distress costs by greater inventories are a
more important concern.
All five countries have negative coefficients on R&D expenses in the
leverage regression. Since R&D may be an important determinant of capital
structure either because of moral hazard effects or because of tax credits, the
discussion of R&D coefficients is included in the section below.
Nondebt Tax Shields

Two types of cross-country tax comparisons are worthwhile: an
examination of aggregate debt levels or an analysis of the varying effect of tax
shields in different countries. In the first type of analysis, the relations between the
levels ofdebt in the five countries can be compared with those predicted by Miller's
(1977) invariance model. Rutterford's (1985) examination of this issue covers a
wider array of data sets than I can address for the same five countries. She
concludes that cross-country debt levels do not properly coincide with country tax
rates; therefore, agency problems are involved. Mayer (1990) also reaches this
conclusion by using aggregate flow of funds data to show that contracting theories
of corporate finance best explain differences in financial structure. Rajan and
Zingales (1995) analyze tax rates and firm leverage in seven countries. They show
that taxes may be a significant determinant of aggregate leverage ratios; however,
their result is sensitive to assumptions about the effective marginal tax rate used to
make the comparison.
A separate question more amenable to analysis here is whether the
coefficients on nondebt tax shields, such as R&D and depreciation, have the
expected ordering between countries. According to DeAngelo and Masulis (1980),
companies with greater reductions in taxes from R&D tax credits or depreciation
require lower debt tax shields and therefore have a lower debt/asset ratio. The
coefficients on R&D and depreciation should be negative and have a larger
magnitude in countries where the value of these nondebt tax shields is greatest.
Although all the countries have negative coefficients on R&D, only the
United States has one that is significantly different from zero. Table 5 provides a
Iisting of the various tax treatments of R&D in these five countries along with the
coefficients from Table 4. The results in Table 5 suggest that if tax effects were the
primary reason R&D affected capital structure, the coefficient in France would have
the largest magnitude (most negative) and the coefficient in the United Kingdom
would have the smallest magnitude. The estimated coefficients in Table 4 follow
this pattern closely, with the most negative coefficient in France (-.332), then
increasing in Germany, the United States, Japan, and barely negative in the United
Kingdom (-.012).
However, the standard errors for the R&D coefficients are too large to
make many statistically significant rankings of the coefficients, primarily because
the non-U.S. firms have a lower standard deviation for the independent R&D
variable (see Table I). This lower variance in how much R&D a firm uses implies
a smaller change in debt/asset ratios for a one-standard-deviation change in R&D.
Although a one-standard-deviation change in U.S. R&D is correlated with a
decrease of 8 percent in the long-term debt/asset ratio, in the other countries, a one-
standard-deviation change in R&D is correlated with a debt/asset ratio decrease
TABLE 5. Summary of Tax Policies Affecting R&D.'
Est. R&D
Country R&D Tax Credit Special Assistance Coefficient
France 50% incremental for R&D grants to selected industries -.332

small and medium firms Military spending (.243)
U.S. 13.2% incremental on R&D Military spending -.087

20% on basic research (.015)
Japan 20% incremental Trade policies beneficial -.054

to R&D equipment (.099)
Germany Tax credit for R&D Investment grants -.114

equipment (.060)
U.K. None Military spending -.012

(.125)
'Excerpted from Leyden and Link (1993), with additional comments from Bronwyn Hall. Figures cited are
for 1989 and later. Incremental credits apply after a minimum has been spent.
of less than I percent. This difference may suggest that U.S. firms specialize much
more according to how much they spend on R&D.
Similarly, countries with a more generous depreciation allowance should
have a more negative coefficient on depreciation in the long-term debt/assets
regression. Calculating the generosity of depreciation allowances requires two
pieces of data: the marginal effective tax rate for the equipment purchase and the
statutory rate faced by the company. Table 6 provides these calculations and the
associated coefficients from Table 4.
Comparison of the coefficients in Table 6 shows that this simplistic
theoretical approach gives mixed results. While France has both the highest
predicted depreciation effect in Table 6 at 85.1 percent, and the most negative
estimated coefficient in Table 4 at - .116, the relative signs of most other countries
do not agree. The United States should have the lowest depreciation effect
according to Table 6, but it actually has the second highest. The standard errors in
Table 4 are too high to reject alternative rankings of these coefficients, and no clear
relation emerges between the estimated coefficients in Table 4 and the depreciation
value given in Table 6.
Profitability
The coefficients on profitability are negative for all five countries, with
Japan's coefficient having the largest magnitude at - 1.694 and the U.S. coefficient
second at -1.154. As Myers (1989) describes, profitability is the single largest
TABLE 6. Tax Rates."
France Germany Japan U.K. U.S.
Marginal effective corporate -48.1 11.5 8.8 8.0 18.5

tax on machinery
Statutory corporate tax rate 37.0 58.1 54.7 34.0 38.3
Difference: 85.1 46.6 45.9 26.0 19.8

Statutory rate - Effective rate
on machinery
Estimated depreciation coefficient -.116 ~.044 -.056 -.082 -.103

(.038) (.015) (.016) (.019) (.024)
"Excerpted from Jorgenson and Landau (1993). Alternatively. this comparison could be based on the
effectve cost to a marginal stockholder. Thus, in countries using an imputation system. such as Germany,
or a partial imputation system, such as France or the United Kingdom, the effective tax rate may be lower
depending on the assumptions about the marginal investor's tax bracket (Rajan and Zingales (1995».
determinant of debt/asset ratios. Specifically, a one-standard-deviation increase in

profitability causes a 4.8 percent decrease in the long-term debt ratio in Japan and
9.6 percent decrease in the long-term debt/asset ratio in the United States (the
United States has a larger dispersion of profitability as shown in Table 1). Rajan
and Zingales (1995) also find a significantly negative correlation between
profitability and debt/asset ratios for Japan, the United States, and the United
Kingdom, with a significantly more negative coefficient on profitability for Japan
than for the United States.
Myers (1989) claims that the negative coefficient on profitability implies
evidence for the pecking order hypothesis. Under this theory, the more negative
coefficient on profitability in Japan is puzzling. Iffirms use a sequence offinancing
alternatives because of information asymmetries as described by Myers and Majluf
(1984), and if Japanese governance systems decrease information asymmetries as
described by Roe (1993), profitability should be less tied to debt/asset ratios in
Japan. Yet, the opposite result seems to hold.
One possible reason for this difference is that higher debt/asset ratios might
exist in Japanese keiretsu, and that the most highly profitable firms do not enter into
these industrial organizations. Another possibility is that the firms might follow a
pecking order in seeking financing, but these preferences may be driven partly by
variations in tax rates and not by the information effects modeled by Myers and
Majluf (1984). Possibly a more detailed examination of keiretsu member and
nonmember firms as well as tax structures could differentiate between these
hypotheses.
The significantly less negative coefficients in the United Kingdom,

Germany, and France also require additional explanation. One possible explanation
would be that institutional features in these countries are successful at reducing
information asymmetries, although prior research for the United Kingdom suggests
otherwise. Alternatively, debt may be more frequently used as a management
discipline device in the manner suggested by Jensen (1986) in these countries.
Growth
The United States is the only country where high growth is associated with
a lower debt/equity ratio. The coefficient on growth for the United States of -.186
may be evidence of Myers's (1977) model. In Myers's model, ongoing growth
opportunities imply a conflict between debt and equity interests. This conflict
causes the firm to refrain from undertaking net positive value projects. However,
this explanation would not apply to the other countries where faster growing firms
used more debt.
An examination of which firms are growing fastest may illuminate the
differences between countries. For the U.S. sample, the five firms with highest sales
growth include two computer companies, Cisco Systems and Cirrus Logic Inc.; a
meat company, Diana Corporation; a company providing home care for ill patients,
Caremark Inc.; and a biotech firm, Amgen. Of these 'five firms, two have no long-
term debt, and the other three have below average debt ratios.
In contrast, the five firms with highest sales growth in Japan include two
construction companies, a real estate developer, a manufacturer of fire alarms, and
the video game company, Sega Enterprises. All the Japanese high-sales-growth
firms have above average long-term debt ratios. Because of the high proportion of
construction companies, part of the Japanese growth coefficient may be explained
by cyclical factors. Construction companies also use debt financing in the United
States, but the American market for construction did not experience as high a
growth rate in this period. Thus, it may be that the coefficients between countries
are different partly because companies with higher debt ratios in the United States
are in a different part of the business cycle.
The above would still not explain, however, why Sega has an above average
28 percent long-term debt/asset ratio. It is hard to imagine that a U.S. firm with a
similarly high-tech, short-lived product would use debt financing to the same
degree. Part of the explanation may lie in different information effects between the
United States and Japan. Specifically, as Hoshi, Kashyap, and Scharfstein (1990)
show, Japanese firms experience lower costs of financial distress because the
members of a keiretsu have additional information about the firm's status and can
invest profitably in downturns. Thus, the conflict between debtholders and
assetholders in Myers's (1977) model does not apply. Instead, potentially volatile
firms in high-tech fields with many growth opportunities, such as Sega, can get debt
as well as equity financing.
Unfortunately, the high-growth firms in the other three countries are neither
predominantly high tech, as in the United States, nor predominantly in one other
sector, as in Japan.' However, growth is also positively related to long-term
debt/asset ratios for these countries. This relation suggests that the United
Kingdom, Germany, and France share more in common with Japan in terms of
debt/equity conflicts than they do with the United States.
Another approach to the differences between the United States and other
countries could focus not on the agency problems created by debt, but instead on
the agency problems of equity. Some of the important differences may lie in
reporting standards for equity in the United States, rather than in the reduction of
conflicts by German or Japanese banks that own both debt and equity. In this case,
the cost of equity in the United States may be significantly lower, possibly because
of stricter accounting standards and different laws about fraud and fiduciary
responsibility of issuers. Or, the existence of large, well-developed markets, such
as the New York Stock Exchange and Nasdaq, or U.S. venture capital firms may be
the reason for cheaper U.S. growth capital. Part of the explanation might then be
that growth companies in the United States cannot avoid the conflicts pointed out
by Myers (1977), but it may also be in part that many equity concerns begin in the
United States because of cheaper U.S. equity financing. The important differences
in agency problems may be as much the U.S. reduction of the natural costs ofequity
as the Japanese or European reductions in the costs of debt financing.
Toy, Stonehill, Remmers, and Beekhuisen (1974) include a measure of
asset growth in their cross-country regressions. They find a positive coefficient on
growth in Holland, Norway, Japan, and the United States. Since they do not include
any measure of size in their regressions, and since size and growth are positively
correlated, their coefficients may be capturing the size effect rather than the growth
effect. Rajan and Zingales (1995) consider market-to-book ratios in their
regressions, which are sometimes considered an indicator of future rather than past
growth. Their results are different from those in Table 4, as they find a negative
coefficient on market-to-book ratios in all countries, although not significantly
'In France, the high-growth firms are an automotive repair chain, a ventilation system company, a
publisher. a meter manufacturer, and a meat packer. The debt levels of the top live French growth firms also
vary widely. In Germany, the top five high-growth firms are two building or leasing residential property
firms. a mechanical and electrical engineering firm, a lawn mower manufacturer, and a chemicals firm. The
German linns also seem more highly diversified than the U.S. or Japanese firms, and debt levels vary
substantially. In the United Kingdom. the top five high-growth linns are a pharmaceutical company, a
secunty alarm manufacturer, an environmental engineering firm. a newspaper company, and a motion
picture and video production firm. Again. there is no clear pattern for debt levels in the top live U.K. firms.
different from zero in Japan. They interpret these coefficients as indicating a higher
cost to financial distress for companies with larger growth opportunities.
Size
Germany is the only country where large firms have a smaller long-term
debt/asset ratio, and this result holds for total debt, as well. Althogh the size
coefficient, -.325, in Germany is not significant at the 5 percent level, it still
requires some explanation since it contradicts the theories about size and capital
structure discussed for the United States. The size coefficient in France, .222, is
positive, but much smaller than the coefficients in the United States, Japan, and the
United Kingdom. The coefficient for size in France is also not significantly
different from zero, whereas the coefficients in the United States, Japan, and the
United Kingdom are all significantly positive at the 1 percent level. Rajan and
Zingales (1995) also find that the coefficient on size has a different effect in
Germany than in the other G- 7 countries.
Rajan and Zingales (1995) suggest that larger firms are less likely to go
bankrupt; therefore, size would be positively correlated with debt. They note,
however, that given prior work, if Japanese financial distress costs are lower, size
should be less important in Japan. The risk measure 1 include also makes this a less
likely explanation for the observed correlations.
An alternative hypothesis for these differences is that large firms in the
United States use debt to better control management behavior as described by
Jensen (1986) and Williamson (1988). Under this hypothesis, smaller firms are
more subject to shareholder intervention in the case of mismanagement because a
reasonably small group of shareholders can gain a controlling interest in the firm.
Roe (1993) examines corporate governance in Germany, Japan, and the United
States. He suggests that large German firms are much like small U.S. companies in
this way, since German banks control large shares ofeven the largest German firms.
For instance, the largest German firm, Siemens, is 60.64 percent controlled by the
three largest Germany banks. Daimler-Benz, the second largest Germany firm, is
41.80 percent controlled by Deutsche Bank (Roe (1993)). Thus, in Germany, a
small number of professional managers control a sizable percentage of industrial
firm stock and can force management to act in the shareholders' interests. Cable
(1985) shows that control by the major German banks can significantly affect the
profitability ofGerman firms. France's industrial structure shares some similarities
with Germany's, although the government and industrial groups playa larger role
while banks are less influential (Charkham (1994), Franks and Mayer (1990)). If
size is an important determinant of capital structure because it proxies for the
relative dilution ofcontrol, the largest French and German firms would appear more
like small U.S. companies. Thus, these results suggest the centralized firm control
shared by France and Germany is responsible for the low coefficients on size.
A second hypothesis for the differences in debt/asset ratios by size is that

public debt markets are mostly accessible to large firms in the United States, the
United Kingdom, and Japan. The reason large France and German firms do not use
more debt is, then, simply that these countries have a less developed public bond
market. While this explanation may have historically accounted for the differences
in debt use by size, the development of a Eurobond market with issues by major
French and German companies in the late 1980s suggests that lack of a public debt
market cannot completely explain persistent differences.
Edwards and Fischer (1994) dispute the degree to which large banks
actually affect German financial control, either in terms of decreasing bankruptcy
costs in Germany or in terms ofacting as a management discipline device. Edwards
and Fischer question the degree to which any potential benefits from German bank
control extend beyond the largest firms, but the study, like many others, focuses
only on the largest public firms.
Roe (1993) voices the commonly held belief that Japanese industrial
groups, even though they have a slightly more dilute structure, exert the same
influence as bank groups in Germany. The regressions in Table 4, however, suggest
this may not be the case.
v. Conclusion
In this study I conduct a cross-country comparison of five countries, using
empirical data from France, Germany, Japan, the United Kingdom, and the United
States to test alternative theories ofcapital structure within an international context.
I expand on prior studies by examining the determinants of long-term debt/asset
ratios using a set of eight firm characteristics. The purpose of this examination is
to bring into focus the possible effect of institutions and agencies as determinants
of capital structure, and to lay some preliminary groundwork upon which a more
detailed evaluation of institutions might be based.
I verify many of the broad conclusions of sim ilar leverage across countries
given by Rajan and Zingales (1995), but also point out areas where differences may
exist. For although some variables, such as those associated with moral hazard, tax
deductions, R&D, and profitability, have the expected signs and are consistent
across countries, other variables, such as those associated with risk, growth, firm
size, and inventories, show different effects in different countries. This result
indicates that institutions may be significant determ inants of capital structure, and
that agency and monitoring problems, while existing in every country, may create
different outcomes. Although I make some initial suggestions about the causes of
cross-country differences, further work is required to determine which institutions
or agency effects produce the observed correlations.
Appendix Table LA, Comparison of Estimation Methodologies for the United States.
OLS on Positive GLSon LAD

Dependent Variables Positive Estimates Hetero-
Regular and White Dependent on Full Regular skedastic
Parameter Standard Errors Variable Sample Tobit Tobit
Risk -.200 -.218 -.216 -.307 -.251

(.054) (.051) (.036) (.055) (.090)
(.070)
PP&E .245 .228 .314 .290 .269
(.025) (.024) (.017) (.025) (.024)
(.070)
Inventories .026 .006 .103 .101 .078
(.031) (.031) (.023) (.032) (.028)
(.032)
R&D -.054 -.088 -.002 -.073 -.087
(.016) (.028) (.003) (.017) (.015)
(.048)
Depreciation -.063 -.055 -.061 -.078 -.103
(.028) (.020) (.0 I0) (.020) (.024)
(.046)
Protitability -.470 -.564 -.627 -.738 -1.154
(.074) (.077) (.046) (.073) (.082)
(.\04)
Sales growth -.105 -.119 -.113 -.185 -.186
(.035) (.035) (.021 ) (.035) (.031)
(.042)
Size .620 .349 1.721 1.849 1.513
(.260) (.244) (199) (.272) (.247)
(.257)
Observations 1,165 1,165 1,329 1,329 1,329

%obs> 0 \00 100 87.66 87.66 87.66
Log likelihood -4996.75 -4935.29
Notes: Dependent variable is (long-term debt)/(total assets). Standard errors are in parentheses. OLS is
ordinary least squares, GLS is generalized least squares, and LAD is least absolute deviations.
Appendix Table 2A. Heteroskedastic Tobit Regressions for Five Countries.
Predicted
Parameter Sign U.S. Japan U.K. Germany France
Risk -.141 .745 .350 .218 -.037

(.068) (.254) (.051) (.173) (.184)
PP&E + .183 .349 .129 .365 .371
(.022) (.033) (.021 ) (.047) (.061)
Inventories + .070 .046 .090 .192 .118
(.026 ) (.036) (.024) (.045) (.053)
(Continued)
Appendix Table 2A. Continued.
Predicted
Parameter Sign U.S. Japan U.K. Germany France
R&D -.077 -.210 ~.O48 -.158 -.120

(007) (.105) (.166) (.044) (.359)
Depreciation -.123 -.066 -088 -.082 -.126
(.023) (.023) (.015) (.015) (.046)
Profitability -/+ -.926 -2.227 -.307 -.068 -.643
(.070) (.171) (046) (.139) (.160)
Sales growth -.227 -.419 -020 .053 -.078
(028) (.055) (021) (063) (.043)
Size 1.104 2.107 .774 -1.1 08 -.229
(.237) (.282) (.184) (.305) (.412)
Observations 1,329 1,350 1.096 316 313

%obs > 0 98.42 99.33 98.18 96.20 100
Log likelihood -5283.29 -5256.77 ~4057.94 -1126.40 -1174.69
Homoskedastic LLK -5322.36 -5304.30 -4099.69 -1163.96 -1184.68
Note: Dependent variable is (total debt)/(total assets). Standard errors arc in parentheses. A constant, risk,
PP&E. inventories. R&D, depreciation. profitability. asset growth, and size are used in the
heteroskedasticity specification.
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The Journal of Financial Research. Vol. XXII, NO.2. Pages 161-187.

HOW FIRM CHARACTERISTICS AFFECT CAPITAL STRUCTURE:

In this empirical study I examine the factors correlated with capital

To determine how firms choose their financing, it is necessary to consider

International comparisons have some advantages over a single-country

II. Data and Methodology

TABLE I. Means, Medians, and Standard Deviations.

Variable U.S. Japan U.K. Germany France

Long debt/assets .185 .155 .098 .088 .145

Total debt/assets .234 .237 .169 .149 .237

Risk .073 .022 .060 038 .037

PP&E/assets .350 .287 .385 .311 .241

Inventories/assets .170 .139 .189 .246 .187

R&D/sales 5.784 1.000 .638 1.387 .579

Depreciation/assets .309 .279 .226 .578 .252

Profitability .071 .053 .087 .057 .072

Growth-Five-year avg. .081 .066 .095 .085 .121

Size-IOOOs US$" 2,416,298 3,032,182 875.946 2.523.340 2,635,876

No. of sample firms 1.329 1,350 1.096 316 313

development (R&D) is generally an expense in each country, R&D as a fraction of

2The log likelihood for the heteroskedastic tobit is:

Factors Affecting Debt/Asset Ratio Analysis

As a final qualifying factor, the Worldscope data may not be a

TABLE 2. Primary Effect ofScveral Capital Structure Theories on Predicted Coefficients.

III. Theories of Capital Structure and U.S. Regressions

Before presenting the cross-country comparisons, I review the results for

TABLE 3. Heteroskedastic Tobit Regression for the United States.

Change in Long-Term Debt/Asset for One-

No. of observations 1,329

Costs of Financial Distress

Nondebt Tax Shields

IV. Cross-Country Comparisons

TABLE 4. Heteroskedastic Tobit Regressions for Five Countries.

Parameter Predicted Sign U.S. Japan U.K. Germany France

Risk ~.251 .335 .152 -.034 .120

No. of observations 1,329 1,350 1.096 316 313

Costs ofFinancial Distress

Figure I. Long-Term Debt/Asset Ratio by Risk Decile.

percent increase in the debt/asset ratio, whereas a one-standard-deviation increase

Nondebt Tax Shields

TABLE 5. Summary of Tax Policies Affecting R&D.'

France 50% incremental for R&D grants to selected industries -.332

U.S. 13.2% incremental on R&D Military spending -.087

Japan 20% incremental Trade policies beneficial -.054

Germany Tax credit for R&D Investment grants -.114

U.K. None Military spending -.012

TABLE 6. Tax Rates."

France Germany Japan U.K. U.S.

Marginal effective corporate -48.1 11.5 8.8 8.0 18.5

Statutory corporate tax rate 37.0 58.1 54.7 34.0 38.3

Difference: 85.1 46.6 45.9 26.0 19.8

Estimated depreciation coefficient -.116 ~.044 -.056 -.082 -.103

determinant of debt/asset ratios. Specifically, a one-standard-deviation increase in

The significantly less negative coefficients in the United Kingdom,

A second hypothesis for the differences in debt/asset ratios by size is that

OLS on Positive GLSon LAD

Risk -.200 -.218 -.216 -.307 -.251

Observations 1,165 1,165 1,329 1,329 1,329

Appendix Table 2A. Heteroskedastic Tobit Regressions for Five Countries.

Risk -.141 .745 .350 .218 -.037

Appendix Table 2A. Continued.

R&D -.077 -.210 ~.O48 -.158 -.120

Observations 1,329 1,350 1.096 316 313