Description of control variables, operationalization, and expected results
| Variables | Formula | E.S. | Justification | Based in | |
|---|---|---|---|---|---|
| Book to Market | BTMit | Book value per share/Market value per share | + | According to the trade-off theory, firms with a high BTM (Book-to-Market) ratio are perceived as less risky by creditors, as they have more tangible assets relative to their market value. This increases their ability to offer collateral, thereby facilitating debt financing | Barbosa and de Souza Costa (2020), Bastos and Nakamura (2009), Cardoso and Pinheiro (2020) |
| Return on Assets | ROAit | Operating profit/total assets | – | More profitable firms tend to rely less on external capital, as suggested by the Pecking Order theory, preferring internal financing | Barbosa and de Souza Costa (2020), Myers and Majluf (1984) |
| Company size | SIZEit | Natural logarithm of asset size | + | Larger firms tend to be perceived as less risky and have greater capacity to provide collateral, increasing their access to credit | Barbosa and de Souza Costa (2020), Bastos and Nakamura (2009) |
| Tangible assets | TANGit | (Fixed assets + inventories)/total assets | + | Tangible assets can be offered as collateral, which reduces risk and facilitates obtaining external financing | Barbosa and de Souza Costa (2020), Cardoso and Pinheiro (2020) |
| Current liquidity | CLit | Current assets/current liabilities | – | According to the Pecking Order theory, a company that is more liquid tends to need less external capital | Cardoso and Pinheiro (2020), Nakamura et al. (2007) |
| Effective Tax Rate | ETRit | Income tax expenses/EBT | + | Firms may use debt financing to reduce their taxable income, thereby increasing the incentive to use external capital | Barbosa and de Souza Costa (2020), Bastos and Nakamura (2009) |
| Auditor | AUDit | Categorical variable for financial information auditor. This assumes zero when it is not audited. Categories created for a NonBig4 auditor and each Big4 company | + | Audits conducted by Big Four firms reduce information asymmetry and increase the firm’s credibility, facilitating access to credit | Atif and Ali (2021), Costa et al. (2017), Hansen et al. (2018) |
| ESG auditor | AUD_ESGit | Categorical variable for ESG information auditor. This assumes zero when ESG information is not audited. Categories created for, a non-Big4 auditor, and for each Big4 company | + | ESG auditing enhances trust in sustainable practices, which may encourage creditors to provide more financing, even at lower capital costs | Atif and Ali (2021), Costa et al. (2017), Hansen et al. (2018) |
| Life cycle stage | LCSit | Categorical variable for life cycle stages according to Dickinson (2011) | +/− | The relationship depends on the firm’s stage in the business life cycle. For instance, growing firms typically require more external capital, while more mature firms may reduce their debt levels | Atif and Ali (2021), Costa et al. (2017), Hansen et al. (2018) |
| Control of Corruption | CoCjt | Perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as “capture” of the state by elites and private interests | +/− | On one hand, it may ease credit access in fragile environments; however, it can also increase perceived risk, prompting creditors to reduce lending | World Bank Databank® |
| GDP growth | GDPGrjt | Annual percentage growth rate of GDP at market prices based on constant local currency | + | During periods of economic growth, market confidence rises, facilitating access to external capital | World Bank Databank® |
| Regulatory Quality | RegQjt | Perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development | + | Firms in countries with strong regulations tend to have easier access to external capital, as systemic risk is lower, and creditor confidence is higher | World Bank Databank® |
| Private credit by deposit money banks and other financial institutions to GDP | PCDBFjt | The financial resources provided to the private sector by domestic money banks as a share of GDP. Domestic money banks comprise commercial banks and other financial institutions that accept transferable deposits, such as demand deposits | + | Firms in countries with greater availability of private credit are more likely to obtain external capital | World Bank Databank® |
| Stock price volatility | SPVoljt | The average of the 360-day volatility of the national stock market index | – | Higher volatility increases the risk perception, prompting creditors to restrict external financing to the firm | World Bank Databank® |
| Stock market total value traded to GDP | SMVTjt | The total value of all traded shares in a stock market exchange is a percentage of GDP | + | More active markets indicate greater liquidity and access to diverse sources of financing | World Bank Databank® |
| Stock market capitalization to GDP | SMCapjt | The total value of all listed shares in a stock market as a percentage of GDP | + | This ratio reflects a country’s financial development, expanding corporate financing options | World Bank Databank® |
| Listed Companies per 1 m people | LCpPjt | Number of listed companies per one million people | + | A higher number of listed companies indicates a more developed and competitive financial environment | World Bank Databank® |
| Bank concentration | BConcjt | Assets of the three largest commercial banks as a share of total commercial banking assets | + | A higher number of banks increases the capacity to grant credit and reduces the cost of capital | World Bank Databank® |
| COVID-19 pandemic | COVt | Dummy variable with value 1 for the period affected by the COVID-19 pandemic, and zero in other cases | + | During the pandemic, governments adopted stimulus policies, including expanded corporate credit, to mitigate the crisis effects | Griffiths et al. (2021), Sinha and Vodwal (2023) |
| Subprime crisis | Subprimet | Dummy variable with value 1 for the period affected by the Subprime crisis, and zero in other cases | + | After the initial impact, many countries responded with expansionary policies that increased corporate credit | Atif and Ali (2021), Hansen et al. (2018), Sinha and Vodwal (2023) |
| Variables | Formula | E.S. | Justification | Based in | |
|---|---|---|---|---|---|
| Book to Market | BTMit | Book value per share/Market value per share | + | According to the trade-off theory, firms with a high BTM (Book-to-Market) ratio are perceived as less risky by creditors, as they have more tangible assets relative to their market value. This increases their ability to offer collateral, thereby facilitating debt financing | |
| Return on Assets | ROAit | Operating profit/total assets | – | More profitable firms tend to rely less on external capital, as suggested by the Pecking Order theory, preferring internal financing | |
| Company size | SIZEit | Natural logarithm of asset size | + | Larger firms tend to be perceived as less risky and have greater capacity to provide collateral, increasing their access to credit | |
| Tangible assets | TANGit | (Fixed assets + inventories)/total assets | + | Tangible assets can be offered as collateral, which reduces risk and facilitates obtaining external financing | |
| Current liquidity | CLit | Current assets/current liabilities | – | According to the Pecking Order theory, a company that is more liquid tends to need less external capital | |
| Effective Tax Rate | ETRit | Income tax expenses/EBT | + | Firms may use debt financing to reduce their taxable income, thereby increasing the incentive to use external capital | |
| Auditor | AUDit | Categorical variable for financial information auditor. This assumes zero when it is not audited. Categories created for a NonBig4 auditor and each Big4 company | + | Audits conducted by Big Four firms reduce information asymmetry and increase the firm’s credibility, facilitating access to credit | |
| ESG auditor | AUD_ESGit | Categorical variable for ESG information auditor. This assumes zero when ESG information is not audited. Categories created for, a non-Big4 auditor, and for each Big4 company | + | ESG auditing enhances trust in sustainable practices, which may encourage creditors to provide more financing, even at lower capital costs | |
| Life cycle stage | LCSit | Categorical variable for life cycle stages according to | +/− | The relationship depends on the firm’s stage in the business life cycle. For instance, growing firms typically require more external capital, while more mature firms may reduce their debt levels | |
| Control of Corruption | CoCjt | Perceptions of the extent to which public power is exercised for private gain, including both petty and grand forms of corruption, as well as “capture” of the state by elites and private interests | +/− | On one hand, it may ease credit access in fragile environments; however, it can also increase perceived risk, prompting creditors to reduce lending | World Bank Databank® |
| GDP growth | GDPGrjt | Annual percentage growth rate of GDP at market prices based on constant local currency | + | During periods of economic growth, market confidence rises, facilitating access to external capital | World Bank Databank® |
| Regulatory Quality | RegQjt | Perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development | + | Firms in countries with strong regulations tend to have easier access to external capital, as systemic risk is lower, and creditor confidence is higher | World Bank Databank® |
| Private credit by deposit money banks and other financial institutions to GDP | PCDBFjt | The financial resources provided to the private sector by domestic money banks as a share of GDP. Domestic money banks comprise commercial banks and other financial institutions that accept transferable deposits, such as demand deposits | + | Firms in countries with greater availability of private credit are more likely to obtain external capital | World Bank Databank® |
| Stock price volatility | SPVoljt | The average of the 360-day volatility of the national stock market index | – | Higher volatility increases the risk perception, prompting creditors to restrict external financing to the firm | World Bank Databank® |
| Stock market total value traded to GDP | SMVTjt | The total value of all traded shares in a stock market exchange is a percentage of GDP | + | More active markets indicate greater liquidity and access to diverse sources of financing | World Bank Databank® |
| Stock market capitalization to GDP | SMCapjt | The total value of all listed shares in a stock market as a percentage of GDP | + | This ratio reflects a country’s financial development, expanding corporate financing options | World Bank Databank® |
| Listed Companies per 1 m people | LCpPjt | Number of listed companies per one million people | + | A higher number of listed companies indicates a more developed and competitive financial environment | World Bank Databank® |
| Bank concentration | BConcjt | Assets of the three largest commercial banks as a share of total commercial banking assets | + | A higher number of banks increases the capacity to grant credit and reduces the cost of capital | World Bank Databank® |
| COVID-19 pandemic | COVt | Dummy variable with value 1 for the period affected by the COVID-19 pandemic, and zero in other cases | + | During the pandemic, governments adopted stimulus policies, including expanded corporate credit, to mitigate the crisis effects | |
| Subprime crisis | Subprimet | Dummy variable with value 1 for the period affected by the Subprime crisis, and zero in other cases | + | After the initial impact, many countries responded with expansionary policies that increased corporate credit |
Note(s): Ln: natural logarithm; EBT: earnings before taxes. E.S.: Expected signal
Source(s): Created by authors
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