This study investigates the interplay between country-level governance quality and the capital structure choice at the firm level in Brazil and Chile. We examine the association between a firm’s ownership concentration and its debt maturity structure and whether country-level governance quality influences this association.
Using a large firm-level dataset from Brazil and Chile for the period 2008-2013, we find a positive association between low ownership concentration and debt maturity. However, this association becomes negative when the largest shareholder has high ownership concentration. This result suggests that long-term debt and ownership concentration act as substitute monitoring mechanisms. Moreover, debt maturity is inversely related to our aggregated index of country-level governance quality, suggesting that in countries with governance systems that effectively protect debt holders, firms with high benefits of control (high ownership concentration) will use debt with shorter repayment periods in order to benefit from frequent monitoring by debt holders. Overall, our results support the view that financial markets tend to pressure firms with high benefits of control or greater agency conflict to make a tradeoff between the benefits of control and the cost and maturity structure of debt financing.
This study contributes to the research on comparative corporate governance and capital structure. We also respond to recent calls to bridge the gap between under- and over-socialized views of corporate governance by examining the interplay between firm- and country-level governance variables. Our findings suggest a substitution effect between monitoring by equity holders and by debt holders, and that country-level governance quality exerts a disciplinary influence over a firm’s choice of debt maturity structure.
Investors seeking to enter emerging markets such as Brazil and Chile can benefit from considering national governance factors that enhance debt holders' external monitoring effectiveness. Because our findings show the importance of considering and improving the quality of country-level governance, they are also useful for policy makers aiming to reform corporate governance practices in emerging markets.