The signaling value of legal form in debt financing

Felix Bracht, Jeroen Mahieu and Steven Vanhaverbeke

POID Working Papers from Centre for Economic Performance, LSE

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)
Date: 2022-12-15
New Economics Papers: this item is included in nep-cfn, nep-ent, nep-opm and nep-sbm
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://poid.lse.ac.uk/textonly/publications/downloads/poidwp052.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cep:poidwp:052

Access Statistics for this paper

More papers in POID Working Papers from Centre for Economic Performance, LSE
Bibliographic data for series maintained by ().