We test whether a country's level of financial development or institutional quality (or both) has a first‐order effect on corporate debt maturity decisions on a sample of 359 non-financial firms from five South American countries over a 12‐year period. We find that there is a substantial dynamic component in the determination of a firm's debt maturity, and firms face moderate adjustment frictions toward their optimal maturities. More importantly, the level of financial development does not influence debt maturity, whereas the institutional quality of a country has a significant positive effect on the level of long-term debt in a firm's financial structure. Our results support the hypothesis that the quality of national institutions is an important determinant of corporate financing in general and of debt maturity in particular.

We develop a new rationale for capital allocation in business groups’ internal capital markets. We show that productivity and pledgeable income jointly drive capital allocation within an internal capital market. In financially constrained business groups, an efficient internal capital market can allocate marginal funds to firms that have high pledgeability of income because of a multiplier effect: a dollar of internal funds generates a bigger increase in investment. This result has important implications for the business group affiliation strategy. Whether or not a financially constrained but highly productive firm will benefit from group affiliation depends on its borrowing capacity vis-à-vis other affiliates.