JICA Research Institute

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Working Papers

No.160 Determinants of Firms’ Capital Structure Decisions in Highly Dollarized Economies: Evidence from Cambodia

This paper empirically investigates the features and determinants of capital structure decisions of firms in an almost completely dollarized credit market using survey-based data collected by the National Bank of Cambodia and JICA Research Institute in 2014. Specifically, we estimate the determinants of the ratio of bank loans to total assets, using a sample selection model.

The major findings are as follows: Firstly, we find that loans from commercial banks are important funding sources for Cambodian firms, and all of the bank loans are denominated in FX currency, especially US dollars. Secondly, the ratio of bank loans to total assets depends positively on how much collateral they can provide for bank loans. Thirdly, firms that possess property and casualty insurance have higher ratios of bank loans to total assets. Lastly, in the Cambodian situation where bank loans are only available in FX currency, currency mismatch risks push firms to reduce the ratio of bank loans to total assets, especially for highly profitable firms. We find that highly profitable firms tend to decrease (increase) the ratio of bank loans in response to an increase (a decrease) in currency mismatch risk, although less profitable firms are not affected by such currency mismatch risks.

These results suggest that, as well as other developing countries, external debt procurement heavily depends on how much collateral the Cambodian firms can provide and the extent of their business risks. Furthermore, our results also suggest that, in highly financially dollarized economies with underdeveloped financial systems such as Cambodia, firms with currency mismatch risks tend to reduce bank loans to deal with currency mismatch risks. Therefore, development of a local currency loan market would allow Cambodian firms with local currency revenues to hedge their currency mismatch risks, leading to improvements in financial deepening and inclusion.

Keywords: Cambodia, Dollarization, Capital structure, Sample selection model

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