The signaling value of legal form in debt financing

Felix Bracht, Jeroen Mahieu and Steven Vanhaverbeke

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

Keywords: legal form; minimum capital requirements; signaling; access to debt; financial constraint (search for similar items in EconPapers)
JEL-codes: D80 G30 M40 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2023-04-17
New Economics Papers: this item is included in nep-cfn and nep-sbm
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:121335

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