Firm Financing in the Euro Area: How Asset Risk Affects Capital Structure Decisions Within the Monetary Union

Using a sample of non-financial listed firms located in the Euro area, the determinants of capital structure decisions in the years 2000-2003 are investigated in this study. In line with the traditional theoretical approach and in contrast with traditional empirical literature, the study is based on a market-value measure of leverage, estimated with the Merton model. In a cross-section regressions some variables have similar effects on financing decisions across countries, while others may play a different role; risk, measured as the volatility of the market value of assets, is the best predictor of observed leverage ratios. The integration of Euro-area financial markets varies significantly in different market segments: money and inter-bank markets are highly integrated, corporate bond and equity markets show a clear path of increasing integration, while retail banking markets are much less integrated. Tax and bankruptcy rules differ across the twelve countries, as well as the economic background. As a consequence, nationality is still an important determinant of observed debt ratios, despite the monetary union.