How country governance situation affect firm financing arrangements: empirical evidence from selected Asian economies

Abstract

Purpose This study aims to explore the potential impact of country-level governance in corporate financing structures. Design/methodology/approach A two-step system generalized method of moment was used due to the endogeneity issue. The whole sample comprises 3,761 firms in five economies – China, India, Pakistan, Singapore and South Korea – from 2007 to 2016. Findings The results indicate that the debt option for financing is not favorable under governments with an adequate governance arrangement. However, there is a direct and significant link between country governance and equity financing because in adequate governance arrangements, the possibilities of information asymmetry are minimal and businesses consider equity a more appropriate and safer financing instrument. In contrast, firms prefer to trade-credit financing in poor governance economies, which confirms an adverse link between trade credit and adequate governance. Practical implications The country’s governance should be considered a sensitive matter when deciding about corporate financing. Originality/value This arrangement of variables has not been previously analyzed in the literature, suggesting the study’s novelty.