ICELAND Selected Issues
Author: International Monetary Fund
Publication Date:
14 Oct 2005
eISBN:
9781451819298
Language:
English
Keywords:
ISCR; CR; Iceland; mortgage market; firm debt; profitable company; universe of firm; transportation industry; international activity; Stock markets; Tax arrears management; Stocks; Wages
Download PDF (804.5 KB)

This Selected Issues paper for Iceland reports that it faces a considerably less favorable inflation-output variability trade-off than do Canada or the United States. A number of measures should be considered that could help minimize the cost of inflation breaching the tolerance band and help to lower the probability of such events occurring. To effectively target inflation, central banks need to be forward looking, responding early to prospective demand pressures. Having housing prices explicitly in the target ensures that the central bank will monitor developments in the housing market closely.

Abstract

This Selected Issues paper for Iceland reports that it faces a considerably less favorable inflation-output variability trade-off than do Canada or the United States. A number of measures should be considered that could help minimize the cost of inflation breaching the tolerance band and help to lower the probability of such events occurring. To effectively target inflation, central banks need to be forward looking, responding early to prospective demand pressures. Having housing prices explicitly in the target ensures that the central bank will monitor developments in the housing market closely.

IV. Corporate Leverage: How Different Is Iceland?1

A. Introduction

1. Icelandic firms’ leverage has risen sharply since the mid-1990s. Measured as a percentage of GDP, corporate debt went from about 80 percent in 1997 to over 160 percent in 2004. High levels of corporate sector debt, including foreign and short-term, and especially sharp growth in the level of liabilities observed in recent years, have been a concern to both domestic policymakers and foreign observers, given the potential impact on financial and macroeconomic vulnerabilities.

uA04fig01

Iceland: Corporate Debt, 1968–2004 1/

(In percent of GDP)

Citation: IMF Staff Country Reports 2005, 366; 10.5089/9781451819298.002.A004

Source: Central Bank of Iceland.1/ New classsfication of lending from 2003.

2. A proper evaluation of Iceland’s corporate leverage requires comparing Iceland’s corporate sector with that of similar countries. A big difficulty is that such comparisons are often marred by differences in tax systems, accounting principles, and valuation methods, as Rajan and Zingales (1995) point out. La Porta and others (1997 and 1998) argue further that the character of legal rules and the quality of law enforcement also affect decisions on external finance. Because of these considerations, we use four Nordic countries (Denmark, Finland, Norway and Sweden), referred in the text as “N4,” as an “empirical counterpart” to Iceland in our analysis. It seems reasonable to assume that differences of the sort mentioned above are minimal among these countries. For example, when it comes to legal systems, La Porta and others (1997 and 1998) distinguish between various legal systems but group Nordic countries together, referring to a legal system of a Scandinavian origin. Finally, a geographic proximity implies a somewhat similar composition of domestic production.

3. The purpose of this paper is twofold. First, it presents some stylized facts on Iceland’s corporate leverage trends and puts those trends in regional perspective. Second, it analyzes whether corporate leverage in Iceland is related to factors similar to those that influence the leverage of firms in other Nordic countries and examines to what extent Iceland’s differences can be explained by its institutional structures.

4. The rest of the paper is organized as follows. Section B presents the main stylized facts on Iceland’s corporate leverage. Section C analyzes the cross-sectional determinants of capital structure choices and rationalizes the empirical findings. Section D concludes.

B. Stylized Facts

5. Following the method commonly employed in the literature, we compare balance sheets of “average” firms. In particular, we compare medians over years and/or within industries and countries to avoid the influence of extreme values. We also explore cross-sectional differences across firms by estimating a simple regression model where different measures of leverage are presented as a function of variables reflecting characteristics of firms, industries, and countries. The analysis is complicated by several factors, most of which concern data availability. First, data are available only for companies that are listed on stock exchanges. This may introduce a downward bias, as the leverage ratio for nontraded companies may be higher.2 This is a particularly important problem in the case of Iceland since listed companies are just a small subset of the universe of firms. Second, not all firms “survive” the sample because of exits, entries, mergers, and acquisitions. Third, the data may not be perfectly homogenous because of possible accounting differences across countries.

6. Our data come from various sources and cover the period 1995–2003.3 To simplify our analysis, we classify firms into 13 industries (Table 1). Following Rajan and Zingales (1995 p. 1424) we exclude financial firms as “their leverage is strongly influenced by explicit (or implicit) investor insurance schemes such as deposit insurance. Furthermore, their debt-like liabilities are not strictly comparable to the debt issued by non-financial firms. Finally, regulations such as minimum capital requirements may directly affect capital structure.”

Table 1.

Industry Classification

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7. In line with previous literature, we focus on three measures of leverage: debt-to-assets, debt-to-equity, and debt-to-capital ratios. Although the ratio of total liabilities to assets is the broadest definition of corporate leverage, it may not reflect default risk since it includes many items, like provisions, that may not put a firm at risk of bankruptcy. A better definition is, therefore, debt to assets. One problem with this measure, however, is that it is difficult to determine the true value of assets. For this reason, we also use two alternative measures of leverage: debt to equity and debt to capital, with capital defined as a sum of debt and equity.

8. The leverage of Icelandic firms is much higher than of those in N4 countries. We start by comparing medians across the firms in all industries (except financial firms) and through the whole sample.4 As the text figure illustrates, leverage in Iceland is much higher, no matter what indicator is used. The debt-to-assets ratio is 2.9 times higher than the average for N4 countries, while the debt-to-capital ratio is 1.9 times and the debt- to-equity ratio 3.6 times higher. Moreover, as Figure 1 illustrates, that is the case throughout the sample period. For any given year, Iceland’s average debt-to-assets ratio is more than twice that on average across N4 countries. The lowest point is in 1995, when the value for Iceland is 2.4 times higher than for the N4 countries; and the highest is in 2000, when the value for Iceland is 3.2 times higher. The results are similar when alternative measures of leverage are used.

uA04fig02

Leverage Measures, Medians

(in percent)

Citation: IMF Staff Country Reports 2005, 366; 10.5089/9781451819298.002.A004

Figure 1.
Figure 1.

Median of Leverage Ratios, 1995–2003

(in percent)

Citation: IMF Staff Country Reports 2005, 366; 10.5089/9781451819298.002.A004

Sources: Thomson Analytics; Central Bank of Iceland; and staff calculations.1/ Legend applies to all panels.

9. An industry comparison across countries indicates that this phenomenon is not specific to any industry. Figure 2 illustrates the debt-to-assets ratio for a given year (2003) in the industries, as defined above. It shows that the leverage of Icelandic firms is higher than that of firms in other Nordic countries in all of the industries for which data are available. While in the transportation industry (industry 8) the leverage of Icelandic firms is 1.4 times higher than the N4 average, it is 6.5 times higher in the services industry (industry 11). Figure 3 demonstrates the dynamics of leverage measures in different industries and shows that all Icelandic industries have high leverage ratios that have remained relatively stable over the whole sample period.

Figure 2.
Figure 2.

Median Leverage Ratios by Industries, 2003 1/

(in percent)

Citation: IMF Staff Country Reports 2005, 366; 10.5089/9781451819298.002.A004

Sources: Thomson Analytics; Central Bank of Iceland; and staff calculations.1/ See Table 1 for industry classifications.
Figure 3.
Figure 3.

Iceland: Median Leverage Ratios by Industry 1/

(in percent)

Citation: IMF Staff Country Reports 2005, 366; 10.5089/9781451819298.002.A004

Sources: Thomson Analytics; Central Bank of Iceland; and staff calculations.1/ See Table 1 for industry classifications.2/ Legend applies to all panels.

Share of Firms in Each Size Category, 1996

article image

10. Iceland’s corporate leverage remains the highest when firms are differentiated according to their size. We classify each firm into one of three size categories (small, medium, and large) by pooling firms from all countries and forming three quantiles based on the real value of assets in U.S. dollars. As expected, most Icelandic firms fall under the category of “medium” size. For each size category, Icelandic firms have the highest leverage by all measures. The size gap between the smallest and largest firms in Iceland is just between 6 percent and 19 percent (see Figure 4), well below the size gap for N4 countries. One possible explanation for this difference in size gaps may be the fact that smaller Icelandic firms are already highly leveraged. Unlike other Nordic countries, leverage is not monotonically increasing in size in Iceland since medium sized firms have lower leverage than small ones.

Figure 4.
Figure 4.

Median Leverage Ratios by Firm Size

(in percent)

Citation: IMF Staff Country Reports 2005, 366; 10.5089/9781451819298.002.A004

Sources: Thomson Analytics; Central Bank of Iceland; and staff calculations.1/ Legend applies to all panels.

11. Icelandic firms rely on short-term borrowing more than their counterparts in Finland, Norway, and Sweden. The text figure illustrates the dynamics of the share of the short-term debt in Nordic countries. It shows that in two countries—Iceland and Denmark, reliance on short-term financing is much higher ranging from 29 to 49 percent. At the same time, in Finland the share of the short-term debt has been fairly low and constant over the decade, averaging around 26 percent. In Norway and Sweden it has been on the rise but from rather low levels (15 and 18 percent) and reaching in 2003 levels comparable to those in Finland (20 and 28 percent versus 26 percent). On average, Icelandic firms have twice the short-term liabilities than their counterparts in Finland, Norway and Sweden do. The difference between these countries was highest in 1997 (44 percent versus an average of 17 percent), while in 2003 it was at the lowest (36 percent versus an average of 25 percent).5

uA04fig03

Share of Short-Term Debt, 1995–2003

(in percent)

Citation: IMF Staff Country Reports 2005, 366; 10.5089/9781451819298.002.A004

C. What Factors Explain Iceland’s

Corporate Leverage?

12. In the previous section, we have identified differences between Iceland’s corporate leverage and the rest of the Nordic countries. We now analyze the factors underlying cross-sectional differences among the firms in each country.

Theoretical Considerations

13. The existing literature points to several factors that may explain variations across corporate leverage ratios:

  • Tangibility of assets (+). Tangibility of assets (TANG) is measured as the ratio of fixed to total assets. Theories of capital structure predict that the greater the proportion of tangible assets on the balance sheet, the higher that firm’s leverage. The rationale behind this is that tangible assets serve as collateral, reducing agency costs of debt and increasing the liquidation value of the firm. As a result, banks are more willing to lend to firms with a higher proportion of fixed assets.

  • Growth opportunities (-). Growth opportunities (GROWTH) are measured as the growth of total assets, deflated by the consumer price index (CPI). Myers (1977) established that highly leveraged companies may avoid profitable investment opportunities. Therefore, we would expect firms with positive growth prospects to have more equity in their capital structure.

  • Size (?). Size (SIZE) is measured as the logarithm of real assets. The effect of size on leverage is ambiguous. On the one hand, larger firms are diversified and fail less, reducing the bankruptcy risk and, therefore, increasing the willingness of banks to extend credit (+). On the other hand, size may be a proxy for the degree of information of outside investors, increasing the preference for equity rather than debt in the firm’s capital structure (-).

  • Profitability (?). Profitability (PROFIT) is measured as the ratio of earnings before interest and taxes (EBIT) to total assets. The theoretical predictions on the effects of profitability on leverage are again ambiguous. The relationship between profitability and leverage could be negative if firms prefer to finance with internal funds rather than debt (Myers and Majluf, 1984). However, that relationship would be positive if the market for corporate control forces firms to commit themselves to paying out cash by leveraging up (Jensen, 1986).6

  • Volatility of earnings (-). The volatility of earnings (VOLATILITY) is measured as the standard deviation of changes in EBIT, scaled by average EBIT. Bradley, Jarrel, and Kim (1984) develop a theoretical model showing that firm leverage ratios are negatively related to the volatility of firm earnings if the costs of financial distress (bankruptcy costs and agency costs of debt) are nontrivial. Moreover, Claessens, Djankov, and Nenova (2000) argue that the optimal leverage could decrease with an increase in the volatility of earnings as managers minimize the probability of earnings falling below interest expenses.

  • Tax advantage of debt (+). Tax advantage of debt (TAX) is measured using the formula for the gain from leverage from Miller (1977):
    [1−(1−τc)(1−τs)(1−τb)]D,

    where τc is the corporate tax rate, τs the dividend tax, τb the interest on income from bonds (i.e. the interest tax rate), and D is the value of outstanding firm debt (in U.S. dollars, logs). Tax advantage arises when tax rates are such that for the same amount of financing, net-of-taxes interest payments are higher than net-of-taxes dividends.7

  • Degree of internationalization (-). The degree of internationalization (DOI) is an industry specific variable. It is measured as the exports of the particular industry over the production in that industry.8 A common argument is that multinational companies (or companies that are export oriented) have greater costs of debt financing due to higher agency costs as well as greater exchange rate and political risks (Chen and others, 1997; Burgman, 1996; and Fatemi, 1984).9

Empirical Analysis

14. Our objective is to examine the relationship between the leverage variables and their theoretical determinants, in order to explain Iceland’s relatively high leverage. We used three measures of leverage in 2000 as dependent variables: (i) the debt-to-assets ratio (DA); (ii) the debt-to-equity ratio (DE); and (iii) the debt-to-capital ratio (DC). The explanatory variables are as outlined above—tangibility of assets (TANG), growth opportunities (GROWTH), size (SIZE), profitability (PROFIT), volatility of earnings (VOL), tax advantage of debt (TAX), and degree of internationalization (DOI).

15. An examination of the sample means of explanatory variables reveals the following (Table 2):

  • Compared with the N4 mean, Icelandic firms have (i) higher proportion of tangible assets (TANG); (ii) lower growth opportunities (GROWTH); (iii) smaller size (SIZE); (iv) similar profitability (PROFIT) but higher volatility of earnings (VOL); (v) higher tax advantage of debt (TAX);10 and (vi) a lower degree of internationalization (DOI).11 However, some of these results may be driven by outliers. In particular, if we look at median values, we find that growth opportunities of Icelandic firms are higher while profitability is slightly lower.

  • A priori, the fact that Icelandic firms have, on average, a higher proportion of tangible assets than the N4 average, relatively lower growth opportunities, higher tax advantage of debt, and a lower degree of internationalization suggests that these factors may help explain the higher degree of indebtedness among Icelandic firms.

Figure 5.
Figure 5.

Tax Advantage of Debt (Low Values) over Equity (High), 1995–2003

Citation: IMF Staff Country Reports 2005, 366; 10.5089/9781451819298.002.A004

Table 2.

Variable Definitions and Mean Values, 1996–2000 1/

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See paragraph 13 for definition of variables.

16. The partial correlations between the leverage measures and their potential determinants can be examined in a simple cross-section regression. In particular, for each country in the sample, the leverage measures (DA, DE, and DC) in 2000 are regressed on the four-year average (1996–99) of the explanatory variables (TANG, GROWTH, SIZE, PROFIT, VOL, TAX, and DOI).12 The coefficients are estimated using a censored Tobit model.13 The main results from the cross-section analysis can be summarized as follows (Tables A.1, A.2 and A.3):

  • Tangibility is significant and negatively correlated with the debt to equity in Iceland, but there is no significant relationship with the other two measures of leverage. However, for those N4 countries for which tangibility is significant, it is positively correlated with the debt-to-assets measure.14 Contrary to the theoretical predictions, it appears that Icelandic firms with many fixed assets are not highly leveraged. One possible explanation is that tangibility matters less in bank-oriented countries like Iceland (see below). This is an argument made by Berger and Udell (1994), who show that firms with close relationships with creditors need to provide less collateral because that relationship (and more informed monitoring by creditors) substitutes the need for collateral.

  • Growth opportunities do not have any significant impact on leverage except for Norway, where they are positively correlated with the debt-to-assets and debt-to-equity ratios, and Denmark, where they are positively correlated with the debt–to-capital ratio.

  • Size is negatively correlated with leverage for all countries in our sample. One potential explanation is that informational asymmetries between insiders and the equity market are smaller for large firms, and, therefore, larger firms would be able to issue securities more easily and substitute debt for equity. Another potential explanation is that costs of financial distress are low in Nordic countries, and, therefore, size (as a proxy of probability of default) should not matter. However, this does not explain why larger firms in Nordic countries have less debt than smaller firms.

  • Profitability is negatively correlated with two measures of leverage (the debt-to-assets and debt-to-capital ratios) for Iceland and Finland. This result is consistent with the empirical findings of the literature (see for example Rajan and Zingales, 1995 and Claessens and others, 2000) and is probably due to the fact that more profitable companies finance themselves to a larger extent with retained earnings.

  • Volatility of earnings is insignificant for all countries except in Norway, where it is positively correlated with the debt-to-assets ratio, and in Denmark, where it is negatively correlated with the debt-to-capital ratio.

  • A higher tax advantage of debt over equity increases leverage for all countries, as predicted by the theory. Surprisingly, the coefficient of the tax advantage of debt over equity for Iceland is up to three times larger than that of the N4 countries. However, the result for Iceland may be affected by the sample period: we do not cover the years when Iceland decreased its corporate tax rates, which could have made the tax effect less of a factor in determining the capital structure of firms.

  • The degree of internationalization is significant and positively correlated with all measures of leverage in Iceland. However, it is insignificant for the N4 countries for most of the specifications.15 In contrast to the theoretical predictions, it appears that firms in export-oriented industries in Iceland are highly leveraged. One potential explanation is the small size of the Icelandic capital market, which would make difficult for a firm to finance its activities through equity. Another factor could be that the cost of debt financing decreases with firm international activity. In fact, Mansi and Reeb (2002) find that firm international activity is, on average, associated with a 13 percent reduction in the cost of debt financing and a 30 percent increase in firm leverage.

17. The results of our regressions indicate that the factors explaining Iceland’s corporate leverage are different from those in N4 countries. In particular, the observed correlations of the tax advantage of debt and the degree of internationalization with corporate leverage in Iceland are different from the correlations observed in other Nordic countries. This may be a factor explaining accumulation of debt by Icelandic firms. More generally, institutional differences between Iceland and the N4 countries may explain differences in corporate leverage.

18. One important institutional difference that may explain Iceland’s high corporate leverage is the level of development of its financial markets. Demirguc-Kunt and Levine (1999) compare financial markets of about 150 countries. Though the study is likely to be somewhat outdated (it is based on data collected in the late 1990s), it nevertheless provides some useful insights. The banking sector is evaluated based on four indicators, all of them measured as a share of GDP: liquid liabilities (a general indicator of the size of financial intermediaries); banks assets (the overall size of the banking sector); claims of deposit money banks on the private sector (an indicator of bank activity in the private sector); and claims of other financial institutions on the private sector (an indicator of nonbank activity in the private sector).16 As Table 3 shows, indicators for Iceland are somewhat below those for other Nordic countries and an “average” country. However, it seems reasonable to believe that, following the privatization of the banks and especially after their rapid expansion in the last two years, this is no longer the case. At the same time, the stock market in Iceland is less developed than in the N4 countries. The equity markets are evaluated based on two measures: market capitalization as a share of GDP, and total value traded as a share of GDP. The former indicates the size of the market and the latter its liquidity. Another measure of liquidity is the turnover ratio, defined as the value traded as a share of the market capitalization. In contrast to Table 3, Table 4 shows that indicators for Iceland are much lower than those for other Nordic countries and an “average” country.

Table 3.

Comparison of Banking Sector across the Nordic Countries

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Table 4.

Comparison of Equity Market across the Nordic Countries

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19. Overall, Iceland’s banking sector is quite active when compared to other Nordic countries, while the stock market is not. Following Demirguc-Kunt and Levine (1999) methodology, we classify the countries in our sample into bank-based and market-based economies, based on two ratios: (i) the ratio of claims of deposit money banks on the private sector to the total value of traded stocks; and (ii) the ratio of domestic assets of deposit money banks to market capitalization.17 Table 5 clearly indicates that, in Iceland, the banking sector dominates the stock market, and thus, Iceland falls into the category of bank-based economies.18 This observation suggests that borrowing from the banks, as opposed to raising equity, may be the easiest way for companies to finance their expansion. While Icelandic firms are now quite aggressively entering foreign markets (especially the United Kingdom and the Nordic countries), it does not seem that they have reached the stage yet when they can easily rely on raising equity on foreign stock exchanges.

Table 5.

Relative Importance of Banking Sector versus Equity Market

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D. Conclusions

20. This paper establishes that Icelandic firms are more leveraged than firms in other Nordic countries, thus raising concerns about financial and macroeconomic vulnerabilities. This result is robust to the use of different measures of leverage—the debt-to-assets, debt-to-equity, and debt-to-capital ratios. Moreover, the result holds both across years (1995–2003) and industries. Icelandic firms also seem to rely more on short-term financing than their counterparts in other Nordic countries. Since high leverage, when accompanied by decreased profitability, can contribute significantly to corporate distress by making firms more vulnerable to income, interest rate, and exchange rate shocks, continuing supervisory vigilance is important to limit excessive risk taking by banks and corporates.

21. However, there may be fundamental reasons why Icelandic firms are more leveraged. Empirical analysis identifies two factors that seem to have a particularly strong impact on leverage in Iceland. One of them is the tax advantage of debt over equity, measured using Miller’s ratio of the tax rates (Miller, 1977), which shows that the tax regime has been more beneficial to debt than to equity issuance, at least until recently. The other factor is the industrywide degree of internationalization, as measured by the ratio of exports to production. As expected, leverage is negatively affected by size and profitability, as well as by—contrary to the predictions of the existing literature—tangibility, measured as a share of fixed assets.

22. The paper also argues that high leverage may be caused by the degree of development of different segments of the market. In particular, the paper shows that, while the banking sector is fairly well developed in Iceland, the stock market is not. This observation implies that firms trying to raise funds by issuing equity may face more difficulties than firms issuing debt.

APPENDIX I Data Sources

This appendix describes data sources.

Data on firms’ balance sheets for the N4 countries come from the Thomson Analytics data set. Data on Icelandic firms’ balance sheets come from the Central Bank of Iceland (CBI). In particular, our data set includes information on debt, assets, equity, fixed assets, sales, interest expenses, and earnings before tax and interest payments.

Consumer prices and exchange rate data come from the IMF’s World Economic Outlook (WEO) database.

Data on tax rates on corporate income, dividend earnings and bond interest come from the European Tax Handbook.

Using the World Integrated Trade Solution (WITS) database from the World Bank, we collect data on exports of goods and services in accordance with the 1996 Harmonized System (HS) classification (six digit level) and using the INDSTAT database of the UN Industrial Development Organization, we collect data on production of goods and services in N4 countries in accordance with the third revision of the International System of Industrial Classification (ISIC, three and four digit level). Data on production in Iceland are obtained from the Iceland Statistics website in accordance with the Classification of Economic Activities in the European Community (NACE, third level).

In the Thomson Analytics database, firms are classified according to the 1987 U.S. Standard Industrial Classification (SIC) system. Following Campbell (1996), we reclassify firms into 13 industries—petroleum, finance and real estate, consumer durables, basic, food and tobacco, construction, capital goods, transportation, utilities, textiles and trade, services, other services, and leisure. Data on exports and production are reclassified as well with the help of concordance tables available from Fifoost.org and Jon Haveman’s Industry Concordances websites.1,2

APPENDIX II Regression Results

The cross-sectional regression results are reported in Tables A.1., A.2. and A.3. The dependent variable is the leverage measure in 2000. Independent variables are averaged over the period 1996–99. The coefficients are estimated using a censored Tobit model.

Table A.1.

Factors Correlated with Debt to Assets

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Notes: Absolute value of t-statistics in parentheses.

significant at 10%;

significant at 5%;

significant at 1%.

Table A.2.

Factors Correlated with Debt to Equity

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Notes: Absolute value of t-statistics in parentheses.

significant at 10%;

significant at 5%;

significant at 1%.

Table A.3.

Factors Correlated with Debt to Capital

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Notes: Absolute value of t-statistics in parentheses.

significant at 10%;

significant at 5%;

significant at 1%.

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1

Prepared by Marialuz Moreno Badia and Robert Tchaidze. Haukur Benediktsson of the Central Bank of Iceland compiled the Icelandic firms’ data and contributed to its analysis.

2

Debt contracts are usually a preferred source of financing by investors in the presence of asymmetric information. Therefore, given that markets have more information on traded companies, we would expect that traded companies have lower debt and higher equity in their capital structure than nontraded companies.

3

For a detailed description of the data set see Appendix I.

4

Our calculations exclude those observations for which the leverage measures have negative values.

5

Again, the observed patterns apply only to listed and hence, probably more successful companies.

6

Nonetheless, if the market for corporate control is ineffective, managers will avoid financing with debt, and, therefore, the relationship will again be negative.

7

In the absence of taxes, the ratio is equal to 1, and the Modigliani-Miller theorem holds, that is, firms are indifferent between debt and equity financing.

8

Because of data limitations, we are unable to construct a firm specific variable. Moreover, there are serious data problems in the industry specific variables because data for exports and production come from different sources and do not match fully.

9

However, research by Reeb and others (2001) has found that international diversification is associated with lower cost of debt financing.

10

Figure 5 plots the Miller ratio (1 − τc) (1 − τs) (1 − τb) and shows that Icelandic tax regime up to 2002 used to be more attractive to issuing debt rather than equity.

11

Caution should be exercised when comparing the degree of internationalization across countries because of differences of data coverage across industries.

12

Since not all variables are available for the whole sample period, we have estimated our regressions with data for the period 1996–2000. Following Rajan and Zingales (1995), we average the explanatory variables to reduce the noise and account for slow adjustments. We lag the explanatory variables to reduce the problem of endogeneity.

13

All measures of leverage are truncated at 0. For this reason, we compute Tobit regressions.

14

This is the case for Denmark, Norway, and Sweden.

15

The exceptions are Finland, where the degree of internationalization is positively correlated with the debt-to–capital ratio, and Norway, where it is negatively correlated with the debt-to-equity ratio.

16

Other financial institutions include insurance companies, finance companies, pooled investment schemes (mutual funds), savings banks, private pension funds, and development banks.

17

These ratios relate similar aspects of the two markets.

18

Demirguc-Kunt and Levine (1999) classify Denmark and Sweden as market-based economies, while putting Finland and Norway into a category of bank-based economies. Iceland did not make it into the final classification, as some of the indicators used in the study were missing.

2

The reclassification turns out to be a rather complex procedure as subitems in one classification system often do not have well-defined counterparts in another. Hence, one should take into account that constructed variables are measured with noise.

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Iceland: Selected Issues
Author: International Monetary Fund
Volume/Issue:
Volume 2005: Issue 366
Publisher:
International Monetary Fund
ISBN:
9781451819298
ISSN:
1934-7685
Pages:
69
DOI:
https://doi.org/10.5089/9781451819298.002

Iceland: Corporate Debt, 1968–2004 1/

(In percent of GDP)

Leverage Measures, Medians

(in percent)

Median of Leverage Ratios, 1995–2003

(in percent)

Median Leverage Ratios by Industries, 2003 1/

(in percent)

Iceland: Median Leverage Ratios by Industry 1/

(in percent)

Median Leverage Ratios by Firm Size

(in percent)

Share of Short-Term Debt, 1995–2003

(in percent)

Tax Advantage of Debt (Low Values) over Equity (High), 1995–2003