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Legal effectiveness and external capital: the role of foreign debt

George Allayannis, Gregory W. Brown and Leora Klapper ()

No 3530, Policy Research Working Paper Series from The World Bank

Abstract: Previous research has documented weak, and sometimes conflicting, effects of legal quality on measures of firm debt. Using WorldScope data for 1,689 firms, as well as more detailed proprietary data for 315 firms across nine East Asian countries, the authors find that access to foreign financing appears to loosen borrowing constraints associated with poor legal systems. This helps resolve inconsistencies in prior findings and explains how legal protection is important for borrowing by firms. In particular, they find that legal effectiveness is important for determining the amount, maturity, and currency denomination of debt. The authors discuss several mechanisms by which firms can avoid the costs of poor legal systems with foreign borrowing. The paper contributes to the policy debate surrounding the importance of creditor rights for domestic lending.

Keywords: Municipal Financial Management; Banks&Banking Reform; Economic Theory&Research; Financial Intermediation; Environmental Economics&Policies (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-reg and nep-sea
Date: 2005-03-01
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