Legal variation and capital structure: comparing listed and non-listed companies

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Abstract

We exploit the natural institutional variation in Western Europe to examine leverage (and debt maturity) for listed and non-listed companies (NLCs). We find that the legal efficiency measure (Djankov et al. 2008) is more closely related to the amount of leverage and debt maturity than is the creditor rights score of La Porta et al. (Law and Finance, NBER working paper 5661, 1996; J Financ 52:1131–1151, 1997). One component of the standard measure of creditor rights was consistently and positively associated with leverage: whether secured creditors are paid first in the event of distress. Firms located in French and German legal family countries have less leverage than companies in common law setting, but Scandinavian firms have more. Asset specificity has a negative impact on leverage, but a positive impact on debt maturity. Finally, using a matched sample of otherwise similar privately held companies, we find that listed firms have less debt, consistent with a corporate governance interpretation that presumably more dispersed publicly traded firms are more likely to avoid the disciplining device of leverage. The findings are robust to use of industry-level fixed effects.