Capital Structures in Developing Countries: The Latin American Case

2012. Investigación Económica. Vol. 71, Nº 282, Octubre-Diciembre Pp. 35 - 54

Paulo Vieito , Carlos Maquieira V, Marcelo Gonzalez A, Christian Espinoza M

Abstract:

Most Latin American countries have shifted from a banking-capital market to a public-capital market focus due to the rapid development of private pension fund systems based on individual capitalization. Capital markets based on publicly traded securities were a requirement for the development of the new pension fund system. Argentina, Chile, Mexico and Peru have developed their capital markets along these lines. Chile was the first in adopting this type of pension fund system (1981) and was also the first to shift from a banking-capital market to a public-capital market system. Furthermore, Chile is a special case in the region exhibiting more highly developed capital markets with a higher market capitalization relative to Gross Domestic Product (GDP), a similar ownership concentration compared to other countries of the region, and the lowest country-risk premium (see Djankov, La Porta, López-de-Silanes and Shleifer, 2008; Dyck and Zingales, 2004). Moreover, Chile has low corruption levels, a good quality judicial system, and open and regulated financial markets (the Securities Market Law, the Public Offerings Law, and Corporate Governance Law, among others). The ownership concentration is higher than in developed countries and therefore there are incentives for majority shareholders to obtain private rent at the expense of minority shareholders. Regarding ownership concentration in Chile, on average a mean of 48.8% of shares in the hands of the major shareholder has been reported in the last decade (Espinosa, 2009). Therefore, we anticipate a high probability that Chilean firms make capital structure decisions based on the same variables as the United States (U.S.) companies. However, as we do not want to exclude ex-ante other Latin American countries, we investigate whether firms’ capital-structure decisions in Latin American countries are consistent with highly developed publiccapital markets such as the United States because of the need to provide information to investors in the market. Secondly, since La Porta et al. (1999) classify Argentina, Chile, Mexico and Peru among the French-civil law countries, it is natural to ask whether the capital structure is related to the same determinants found for common law countries such as the United States, since minority shareholder protection differs between the two groups. Finally, to our knowledge, no previous studies employ the model proposed originally by Rajan and Zingales (1995) to observe if the determinants for U.S. companies are also present in Latin American firms. In this study, we employ a different sample with a large number of years of data for U.S. firms, and we test if the previous results reported by Rajan and Zingales (1995) are still in place. We can compare these updated results with the Latin American countries for the same time period. To do so, we use data from 1998 to 2007 and improve the econometric estimates by using panel data with generalized method of moments (GMM) and also solve the endogeneity problem reported by Rajan and Zingales (1995) in their article. This study is organized into four sections. Section II reviews the international evidence on this topic. Section III explains the methodology and describes the sample. Section IV reports the most important results. The final section concludes the study. 

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