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Do Better Institutions Mitigate Agency Problems? Evidence from Corporate Finance Choices

Published online by Cambridge University Press:  06 April 2009

Mariassunta Giannetti
Mariassunta Giannetti
Affiliation:
mariassunta.giannetti@hhs.se, Department of Finance and SITE, Stockholm School of Economics, Sveavägen 65, Box 6501, S-113 83, Stockholm, Sweden.
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Abstract

This paper examines how firm characteristics, legal rules, and financial development affect corporate finance decisions. In contrast to the existing literature, I use data on unlisted companies to show that institutions play an important role in determining the extent of agency problems. In particular, I find that in countries with good creditor protection, it is easier for firms investing in intangible assets to obtain loans. The protection of creditor rights is also important for ensuring access to long-term debt for firms operating in sectors with highly volatile returns. Ceteris paribus, firms are more leveraged in countries where the stock market is less developed. Unlisted firms appear more indebted than listed companies even after controlling for firm characteristics such as profitability, size, and the ability to provide collateral. Finally, institutions that favor creditor rights and ensure stricter enforcement not only are associated with higher leverage, but also with greater availability of long-term debt.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 38 , Issue 1 , March 2003 , pp. 185 - 212
Copyright
Copyright © School of Business Administration, University of Washington 2003

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