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The signaling value of legal form in debt financing

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  • Bracht, Felix
  • Mahieu, Jeroen
  • Vanhaverbeke, Steven

Abstract

We examine if a startup's legal form choice is used as a signal by credit providers to infer its risk to default on a loan. We propose that choosing a legal form with low minimum capital requirements signals higher default risk. Arguably, small relationship banks are more likely to use legal form as a screening device when deciding on a loan. Using data from Orbis and the IAB/ZEW Start-up Panel for a sample of German firms, we find evidence consistent with our hypotheses but inconsistent with predictions of several competing explanations, including differential demand for debt or growth opportunities.

Suggested Citation

  • Bracht, Felix & Mahieu, Jeroen & Vanhaverbeke, Steven, 2023. "The signaling value of legal form in debt financing," LSE Research Online Documents on Economics 121335, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:121335
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    More about this item

    Keywords

    legal form; minimum capital requirements; signaling; access to debt; financial constraint;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

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