Financial Economics Essay Example | Topics and Well Written Essays - 3250 words

Financial Economics - Essay Example ecent finance theory are applicable across countries, much is still to be done to bring out the effect of different institutional features on capital structure choices. Our knowledge of capital structures has mostly been derived from data from developed economies that have many institutional similarities. The purpose of this paper is to analyse the capital structure choices made by companies from developing countries that have different institutional structures (Artikis, 2007). The study also is to examine the determinants that can be used in capital structure choices of firms. This is mainly for small and private firms. In the study, there was use of data obtained from World Bank to determine the differences that exist in capital structure in the countries (DeMarzo & Sannikov, 2004). In accordance with the capital structure theory, the importance of firm level elements of capital structure, tangibility in terms of assets, and profitability of firms and size of companies are brought out. Results are healthy to the different descriptions of size. Large and listed firms can have easy access to finance in developing countries, thus they have higher leverage and higher debt maturities (Bierman, 2003). For small and private firms, access to finance is depended on the conditions of economic environment. Leverage and debt maturities are sensitive to macroeconomic factors. The knowledge on the capital structure in the essay was also used to analyse the choices that are made by institutions, mainly from developing countries that have different structures in their institutions. As in Gordon and Li (2005), profitability is measured using the return on sales (ROS), return on assets (ROA) and return on equity (ROE). With respect to leverage, there are several measures in the literature. Following Gordon and Li (2005), the paper considers the following ratios: Total Debt to Total Assets ratio and total debt to equity ratio. From analysis, it was found out that financial