The determinants of variation in firm leverage across European countries

A Work Project, presented as part of the requirements for the Award of a Masters Degree in Management from the NOVA – School of Business and Economics

In this paper I empirically test what variables directly affect firm leverage across European countries, considering institutional, economic and macroeconomic variables. I find evidence in favour of the trade-off theory, given by the positive relation between profitability and leverage, and also evidence in favour of the pecking-order theory, given by the negative relation between tax rate and leverage. Thus, at the country-level, capital structure choices are partially explained by the trade-off theory and the pecking-order theory. In addition, I find that institutional and macroeconomic factors, such as entry into the EMU and economic crisis, greatly impact firm leverage across European Countries.