Using a unique firm-provincial level panel dataset from 2005 to 2011, this study for the frst time investigates the role played by corruption and provincial institutions in determining a company’s capital structure in Vietnam’s legal environment. Contrasting to the majority of previous studies, the results show that corruption has an insigni cant influence on a company’s bank loans, consistent with institutional theory. | ISSN 2029-4581. ORGANIZATIONS AND MARKETS IN EMERGING ECONOMIES, 2017, VOL. 8, No. 1(15) CORRUPTION, PROVINCIAL INSTITUTIONS AND CAPITAL STRUCTURE: NEW EVIDENCE FROM A TRANSITIONAL ECONOMY Le Trung Thanh* University of Economics and Business, Vietnam National University Abstract. Using a unique firm-provincial level panel dataset from 2005 to 2011, this study for the first time investigates the role played by corruption and provincial institutions in determining a company’s capital structure in Vietnam’s legal environment. Contrasting to the majority of previous studies, the results show that corruption has an insignificant influence on a company’s bank loans, consistent with institutional theory. However, the role of corruption is different for types of various capital structures after controlling for both unobservable characteristics and endogeneity problems. More specifically, corruption has significantly positive influence on short-term capital structure, but a negative impact on long-term loans. All of these results hold after a series of robust tests. Key words: corruption, financial transparency, capital structure and SMEs Acknowledgement: This research is funded by Vietnam National University, Hanoi (VNU) under project number 1. Introduction Theoretically, corruption has been considered as a crucial factor in constructing a state’s legal system, resource distribution and firms’ behavior (Fan, Titman, & Twite, 2012). Corruption affects a company’s capital structure decision in different ways. On the one hand, corruption can lead to a decrease in bank credit. When investors intend to invest in a company, they expect to regain their capital based on criteria specified in the contract (Bolton & Dewatripont, 2005; Leland & Pyle, 1977). However, investors suffer a higher risk in seriously corrupt countries and in the condition of the loose legal environment. These higher risks and potential implementation costs make banks reluctant to offer credits or
