The Role of Creditor Rights on Capital Structure and Product Market Interactions: International Evidence

Journal of International Business Studies, forthcoming

46 Pages Posted: 6 Jun 2017 Last revised: 27 Apr 2020

See all articles by Sadok El Ghoul

Sadok El Ghoul

University of Alberta - Campus Saint-Jean

Omrane Guedhami

University of South Carolina - Moore School of Business

Chuck C.Y. Kwok

University of South Carolina - Darla Moore School of Business

Ying Zheng

Bryant University

Date Written: September 19, 2019

Abstract

An extensive body of international business research examines how cross-country variations in legal institutions influence corporate finance practices. Building on this literature, as well as the literature on capital structure and product market interactions, we investigate the effect of an important dimension of legal institutions – creditor rights – on the product market performance of highly leveraged firms. Using a sample of 37,422 firms from 60 countries over the 1989–2016 period, we find that strong creditor protection benefits less leveraged firms, but adversely affects highly leveraged firms by increasing the adverse responses of customers, competitors, and employees. The adverse effect of creditor rights on the costs of high leverage is more pronounced for firms in countries with developed debt markets and banking systems, but mostly insignificant for firms in countries with developed equity markets and low information asymmetry. Our study offers new insights to the international business literature and contributes to the debate on the role of creditor protection by uncovering a potential cost based on capital structure and product market interactions.

Keywords: creditor rights; capital structure; product market performance; financial systems

Suggested Citation

El Ghoul, Sadok and Guedhami, Omrane and Kwok, Chuck C.Y. and Zheng, Ying, The Role of Creditor Rights on Capital Structure and Product Market Interactions: International Evidence (September 19, 2019). Journal of International Business Studies, forthcoming, Available at SSRN: https://ssrn.com/abstract=2980493 or http://dx.doi.org/10.2139/ssrn.2980493

Sadok El Ghoul (Contact Author)

University of Alberta - Campus Saint-Jean ( email )

Edmonton, Alberta T6G 2R3
Canada
780-465-8725 (Phone)
780-465-8760 (Fax)

Omrane Guedhami

University of South Carolina - Moore School of Business ( email )

Columbia, SC
United States

Chuck C.Y. Kwok

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States
803-777-3606 (Phone)
803-777-3609 (Fax)

Ying Zheng

Bryant University

1150 Douglas Pike
Smithfield, RI 02917
United States
8033189733 (Phone)

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