The effect of financial distress on capital structure: The case of Brazilian banks

This study investigates the effect of financial distress on capital structure, considering banking performance variables and the economic environment. The analysis is based on balanced panel data for Brazilian listed banks, using accounting and non-accounting information on a quarterly basis from September 2009 to December 2016. This study uncovers evidence that the effect of financial distress on capital structure is context-dependent. During normal times, the findings support the argument for higher bank capital in times of financial distress. However, in periods of economic recession, the effect of bank distress on capital was found to be negative, indicating that the impact of banks’ risk on capital is especially important during such periods of market uncertainty. The findings are robust to alternative estimation methods and to alternative measures of risk. This study provides insights for the design of prudent regulation and the supervision of banks, especially for emerging markets economies, considering their highly uncertain environment with widely varying rates of growth and inflation.