The Impact of Bank Regulation on Firms' Capital Structure: Evidence from Multinationals

This paper examines how the capital structure of non-financial firms is affected by international variation in bank regulation. A concise model yields an estimating equation that relates a firm’s capital structure to bank regulatory variables and their interactions with the tax rate reflecting the tax deductibility of interest. We identify an effect of bank regulation on leverage by considering establishments of the same multinational firm located in different countries. Our results indicate that greater capital stringency and greater supervisory power affect negatively firm leverage, while restrictions on activities and on financial conglomerates affect positively. High tax rates mitigate these effects.