CAPITAL STRUCTURE CONVERGENCE AND A DOMINANT-COUNTRY EFFECT: A CASE STUDY OF THE EUROPEAN UNION

Abstract

This exploratory study examines the impact of the formation of the European Union(EU) at the microeconomic level. Specifically, the study investigates the impact on a firm’s capital structure by investigating whether capital structures are becoming more homogeneous across 10 Eu countries over time, and whether capital structures are becoming more homogeneous across 10 Eu countries over time, and whether a dominant-country effect exists. The results suggest movement toward convergence in capital structures across EU economies during the period examined. This evidence, which is particularly true for industrial firms, indicates an increase in homogeneity for companies in this economic community. The evidence also indicates the presence of a dominant-country effect. Specifically, the capital structures in the smaller Eu economies tend to converge on the French capital structure. These changes in capital structure have implications for investor due to changes in the value of the firm as well as policy makers due to the changed need of the market microstructure.