Asset Tangibility and Capital Structure: Does Institutional Heterogeneity Matter?

Existing studies of capital structure show a positive association between tangible assets and leverage, but these studies have ignored the potential systematic variation in magnitude due to institutional heterogeneity across countries. Using a sample from 32 countries, we find that the association between tangible assets and leverage is weaker if firms are located in countries with stronger creditors’ rights, better financial development, good governance, and more transparency. Using the US subprime mortgage crisis as a quasi-natural experiment, we find that the role of tangibility as a determinant of leverage becomes stronger during the crisis period. However, stronger institutional environments (i.e., stronger creditors rights, better financial development, good governance, and high country-level transparency) play a pivotal moderating role and reduce this enhanced association during the crisis period.