Do Better Institutions Mitigate Agency Problems? Evidence from Corporate Finance Choices
This 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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- Rafael La porta & Florencio Lopez-De-Silanes & Andrei Shleifer & Robert Vishny, 2002.
"Investor Protection and Corporate Valuation,"
Journal of Finance,
American Finance Association, vol. 57(3), pages 1147-1170, 06.
- Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert Vishny, 1999. "Investor Protection and Corporate Valuation," Harvard Institute of Economic Research Working Papers 1882, Harvard - Institute of Economic Research.
- Rafael La Porta & Florencio Lopez-deSilanes & Andrei Shleifer & Robert W. Vishny, 1999. "Investor Protection and Corporate Valuation," NBER Working Papers 7403, National Bureau of Economic Research, Inc.
- 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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