The Latvian Allowance for Corporate Equity - Analysis of Effects on Firm Leverage Using Differences-in-Differences

Details

Supervisors

Vandenberghe, Vincent ; Gérard, Marcel

Faculty

Faculté des sciences économiques, sociales, politiques et de communication

Degree label

Master [120] en sciences économiques, orientation générale

Abstract

The present work analyses the effect of the introduction of an Allowance for Corporate Equity in Latvia from 2009 until 2014 on corporate leverage. To this end, I apply propensity score matching and differences-in-differences analysis on a firm level dataset, using Lithuanian and Estonian firms as a control group. General results suggest that counter to intuition, firm leverage increased following the reform, albeit less so for specific subgroups (multinational firms, large firms and public limited companies). Since theory predicts an absolutely increasing negative effect, however, and because there is a possible confounding effect of the financial crisis in 2009, I also apply a generalized version of differences-in-differences. With this alternative method, I indeed find that the reform had a decreasing effect on firm leverage over time.