The heterogeneous effect of governance mechanisms on zero-leverage phenomenon across financial systems

Purpose The purpose of this paper is to investigate whether the effect of country and corporate governance mechanisms on zero leverage is heterogeneous across market- and bank-based financial systems. Design/methodology/approach Using logit regression methods and a sample of listed firms from 14 Western European countries for the 2002-2016 period, this study examines the propensity of firms having zero leverage in different financial systems. Findings Country governance mechanisms have a heterogeneous effect on zero leverage, with higher quality mechanisms increasing zero-leverage propensity in bank-based countries and decreasing it in market-based countries. Board dimension and independency have no impact on zero leverage. A higher ownership concentration decreases the propensity for zero-leverage policies in bank-based countries. Research limitations/implications This study's findings show the importance of considering both country- and firm-level governance mechanisms when studying the zero-leverage phenomenon and that the effect of those mechanisms vary across financial and legal systems. Practical implications For managers, this study suggests that stronger national governance makes difficult (favours) zero-leverage policies in market (bank)-based countries. In bank-based countries, it also suggests that the presence of shareholders that own a large stake makes the adoption of zero-leverage policies difficult. This last implication is also important for small shareholders by suggesting that investing in firms with a concentrated ownership reduces the risk that zero-leverage policies are adopted by entrenched reasons. Originality/value To the best of the authors' knowledge, this is the first study to consider simultaneously the effects of both country- and firm-level governance mechanisms on zero leverage and to allow such effects to vary across financial systems.

Automated summary

The study found heterogeneous effects of country governance mechanisms on zero leverage, with higher quality mechanisms increasing zero-leverage propensity in bank-based countries and decreasing it in market-based countries. Board characteristics and independence had no impact on zero leverage, while higher ownership concentration decreased the propensity for zero-leverage policies in bank-based countries.