Legal Effectiveness and External Capital : The Role of Foreign Debt

Previous research has documented weak, and sometimes conflicting, effects of legal quality on measures of firm debt. Using WorldScope data for 1,689 firms, as well as more detailed proprietary data for 315 firms across nine East Asian countries, the authors find that access to foreign financing appears to loosen borrowing constraints associated with poor legal systems. This helps resolve inconsistencies in prior findings and explains how legal protection is important for borrowing by firms. In particular, they find that legal effectiveness is important for determining the amount, maturity, and currency denomination of debt. The authors discuss several mechanisms by which firms can avoid the costs of poor legal systems with foreign borrowing. The paper contributes to the policy debate surrounding the importance of creditor rights for domestic lending.

Bibliographic Details

Main Authors:	Allayannis, George, Brown, Gregory W., Klapper, Leora F.
Language:	English
Published:	World Bank, Washington, DC 2005-03
Subjects:	ACCOUNTING, BANK ACCOUNTS, BANK LOANS, BANKING SECTOR, BANKING SYSTEM, BANKRUPTCY, BANKS, BOOK VALUE, BORROWING, BORROWING CONSTRAINTS, CAPITAL MARKETS, CAPITAL STRUCTURE, CAPITALIZATION, CASH FLOWS, COLLATERAL, CONTRACT ENFORCEMENT, CORPORATE GOVERNANCE, CURRENCY, DEBT, ECONOMIC DEVELOPMENT, EMERGING MARKETS, EMPIRICAL ANALYSIS, EMPIRICAL RESEARCH, EMPIRICAL STUDIES, EQUILIBRIUM, EQUITY CAPITAL, EXPENDITURE, EXTERNAL FINANCING, FINANCIAL DEVELOPMENT, FINANCIAL ECONOMICS, FINANCIAL INTERMEDIARIES, FINANCIAL INTERMEDIATION, FINANCIAL MARKETS, FINANCIAL RISK, FINANCIAL TRANSACTIONS, FISCAL YEAR, FIXED ASSETS, FOREIGN ASSETS, FOREIGN BANKS, FOREIGN CURRENCY, FORWARD CONTRACTS, GAMBLING, GDP, GDP PER CAPITA, GOVERNMENT SUBSIDIES, HEDGING, INFORMATION ASYMMETRIES, INTEGRITY, INTEREST RATE, INTEREST RATES, INTERNATIONAL BANKS, INTERNATIONAL FINANCE, LAWS, LEGAL PROTECTION, LIBOR, LOCAL CURRENCY, LONDON INTERBANK OFFER RATE, MARGINS, MARKET VALUE, MATURITY, NET INTEREST MARGIN, OIL, OWNERSHIP STRUCTURE, POLITICAL ECONOMY, PROFITABILITY, PROPERTY RIGHTS, PUBLIC BORROWING, QUANTITATIVE ANALYSIS, REGRESSION MODELS, RELATIVE VALUE, SECURED LENDERS, SHAREHOLDERS, STATE INTERVENTION, SUBSIDIARIES, TANGIBLE ASSETS, TRANSPORT,
Online Access:	http://documents.worldbank.org/curated/en/2005/03/5635636/legal-effectiveness-external-capital-role-foreign-debt https://hdl.handle.net/10986/8861
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