How country governance situation affect firm financing arrangements: empirical evidence from selected Asian economies

Abstract

Purpose

This study aims to explore the potential impact of country-level governance in corporate financing structures.

Design/methodology/approach

A two-step system generalized method of moment was used due to the endogeneity issue. The whole sample comprises 3,761 firms in five economies – China, India, Pakistan, Singapore and South Korea – from 2007 to 2016.

Findings

The results indicate that the debt option for financing is not favorable under governments with an adequate governance arrangement. However, there is a direct and significant link between country governance and equity financing because in adequate governance arrangements, the possibilities of information asymmetry are minimal and businesses consider equity a more appropriate and safer financing instrument. In contrast, firms prefer to trade-credit financing in poor governance economies, which confirms an adverse link between trade credit and adequate governance.

Practical implications

The country’s governance should be considered a sensitive matter when deciding about corporate financing.

Originality/value

This arrangement of variables has not been previously analyzed in the literature, suggesting the study’s novelty.

Citation

Subhani, B.H., Farooq, U., Ashfaq, K. and Tabash, M.I. (2024), "How country governance situation affect firm financing arrangements: empirical evidence from selected Asian economies", Society and Business Review, Vol. 19 No. 2, pp. 230-248. https://doi.org/10.1108/SBR-12-2022-0314