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Judicial efficiency and capital structure: An international study

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  • Shah, Attaullah
  • Shah, Hamid Ali
  • Smith, Jason M.
  • Labianca, Giuseppe (Joe)

Abstract

We investigate a particular aspect of creditor rights, judicial efficiency, and its influence on firms' corporate leverage in 69 countries. Increasing creditor rights makes credit more readily available due to greater loan supply, but firms use less leverage to avoid premature liquidation. We find that efficient judicial systems are associated with lower corporate leverage ratios. Managers perceive higher leverage in the presence of more efficient judicial systems as a serious threat to their jobs or private benefits continuing. Our results indicate that stronger creditor rights alone do not explain corporate leverage without taking into account efficient enforcement of these rights.

Suggested Citation

  • Shah, Attaullah & Shah, Hamid Ali & Smith, Jason M. & Labianca, Giuseppe (Joe), 2017. "Judicial efficiency and capital structure: An international study," Journal of Corporate Finance, Elsevier, vol. 44(C), pages 255-274.
  • Handle: RePEc:eee:corfin:v:44:y:2017:i:c:p:255-274
    DOI: 10.1016/j.jcorpfin.2017.03.012
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    Cited by:

    1. Cathcart, Lara & Dufour, Alfonso & Rossi, Ludovico & Varotto, Simone, 2020. "The differential impact of leverage on the default risk of small and large firms," Journal of Corporate Finance, Elsevier, vol. 60(C).
    2. Shah, Muhammad Hashim & Xiao, Zuoping & Abdullah, & Quresh, Shakir & Ahmad, Mushtaq, 2020. "Internal pyramid structure, contract enforcement, minority investor protection, and firms’ performance: Evidence from emerging economies," Research in International Business and Finance, Elsevier, vol. 52(C).
    3. Ripamonti, Alexandre, 2019. "Capital Structure Adjustments and Asymmetric Information," MPRA Paper 96936, University Library of Munich, Germany.
    4. Ewelina Mruk & Inmaculada Aguiar-Díaz & Maria Victoria Ruiz-Mallorquí, 2019. "Use of formal insolvency procedure and judicial efficiency in Spain," European Journal of Law and Economics, Springer, vol. 47(3), pages 435-470, June.
    5. Christophe J. GODLEWSKI, 2019. "How legal and institutional environments shape the private debt renegotiation process?," Working Papers of LaRGE Research Center 2019-08, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.

    More about this item

    Keywords

    Capital structure; Leverage; Judicial efficiency;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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