COMPARATIVE STUDY OF BANKRUPTCY COSTS AND TAXATION EFFECTS ON CAPITAL STRUCTURE IN DEVELOPED VS. EMERGING AFRICAN MARKETS

Abstract

This article investigates the comparative influence of bankruptcy costs and taxation on corporate capital structure decisions in developed economies and emerging African markets. While classical trade-off theory posits that firms balance the tax benefits of debt against the expected costs of financial distress, cross-country differences in institutional quality, legal frameworks, and fiscal regimes significantly alter this balance. In developed markets, where creditor rights are stronger, insolvency procedures more efficient, and tax enforcement stricter, leverage decisions tend to reflect predictable responses to interest tax shields and thin-capitalization rules. In contrast, emerging African markets are characterized by higher bankruptcy costs, prolonged restructuring procedures, weaker recovery rates, and uneven tax administration, all of which constrain the ability of firms to exploit tax advantages of debt. Using a panel dataset covering listed firms across multiple regions from 2015 to 2024, the study applies dynamic panel regressions (system-GMM) and difference-in-differences approaches to capture the impact of tax reforms and insolvency regulations on leverage. The findings suggest that while taxation remains a significant determinant of debt usage in both contexts, its marginal effect is dampened in African markets by elevated financial distress risks and institutional frictions. By highlighting the interaction between tax incentives and bankruptcy environments, this study contributes to a deeper understanding of capital structure dynamics in heterogeneous financial systems. It further provides policy insights for regulators seeking to design tax and insolvency frameworks that foster corporate resilience, sustainable financing, and capital market development.