Do Better Institutions Mitigate Agency Problems? Evidence from Corporate Finance Choices
AbstractThis paper examines how firm characteristics, the legal system and financial development affect corporate finance decisions using a novel and unexplored data set containing balance sheet information for listed and unlisted companies. Contrary to the previous literature, by using data on unlisted companies of small dimension, the paper shows that institutions play an important role in determining the extent of agency problems in corporate finance decisions. In particular, it emerges that in countries with good accounting standards and above-average creditor protection, it is easier for firms investing in intangible assets to obtain loans. Therefore, institutions that are capable of effectively protecting lenders are good substitutes for collateral. The protection of creditor rights is also important for guaranteeing access to long-term debt for firms operating in sectors with highly volatile returns. In contrast, if the law does not guarantee creditor rights sufficiently, lenders prefer to issue short-term debt because they can use the threat not to renew the loan to limit entrepreneurs' opportunistic behavior. In this case, inefficiencies due to the excessive liquidation of projects in temporary difficulty may arise. Ceteris paribus, firms are more leveraged in countries where the stock market is less developed. Moreover, unlisted firms appear systematically more indebted even after controlling for firm characteristics, such as profitability, size and the ability to provide collateral. Finally, institutions, which favor creditor rights and ensure stricter enforcement, are associated with higher leverage, but also with greater availability of long-term debt.
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Bibliographic InfoPaper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 376.
Date of creation: Jul 2000
Date of revision:
leverage; debt maturity; agency problems; enforcement; creditor rights;
Other versions of this item:
- Giannetti, Mariassunta, 2003. "Do Better Institutions Mitigate Agency Problems? Evidence from Corporate Finance Choices," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(01), pages 185-212, March.
- Giannetti, M., 2000. "Do Better Institutions Mitigate Agency Problems? Evidence from Corporate Finance Choices," Papers 376, Banca Italia - Servizio di Studi.
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
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- Demirguc-Kunt, Asl1 & Maksimovic, Vojislav, 1996. "Institutions, financial markets, and firms'choice of debt maturity," Policy Research Working Paper Series 1686, The World Bank.
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