Recent international financial research finds that a firm’s capital structure is not only influenced by firm- and industry-specific determinants, but also by country-specific factors. Starting from the last decade’s studies on the country effect and addressing some areas of potential development in empirical testing, we test, on a sample of seven apparently similar European countries and more than 800,000 variously sized firms (from the BACH-ESD database) over a ten year period (2000-2009), the direct effects of country characteristics on leverage, as well as their mediating role on the effects of firm- and industry-specific determinants, by using a simultaneous equation model (SEM) never used before by any scholar in this field. The emerging empirical evidence: i) highlights the relevance of many institutional, financial, and macroeconomic country characteristics; ii) confirms the better ability of banks in selecting, monitoring, and financing small and risky firms; iii) shows that the demand-side perspective can better explain some counter-intuitive effects of some determinants on leverage.