Legal Effectiveness and External Capital: The Role of Foreign Debt

31 Pages Posted: 25 Jul 2004

See all articles by George Allayannis

George Allayannis

University of Virginia - Darden School of Business

Gregory W. Brown

University of North Carolina (UNC) at Chapel Hill - Finance Area

Leora F. Klapper

World Bank; World Bank - Development Research Group (DECRG)

Date Written: July 2004

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, we find that access to foreign financing appears to loosen borrowing constraints associated with poor legal systems. This helps resolve inconsistencies in prior findings as well as explains how legal protection is important for debt use. In particular, we find that the legal effectiveness is important for determining the amount, the maturity, and the currency denomination of debt. We discuss several mechanisms by which firms can avoid the costs of poor legal systems with foreign borrowing. Finally, this paper contributes to the policy debate surrounding the importance of creditor rights for domestic lending.

Keywords: Foreign currency debt, legal origin

JEL Classification: F34, G32

Suggested Citation

Allayannis, George and Brown, Gregory W. and Klapper, Leora F., Legal Effectiveness and External Capital: The Role of Foreign Debt (July 2004). World Bank Policy Research Working Paper No. 3530. Available at SSRN: https://ssrn.com/abstract=568283

George Allayannis

University of Virginia - Darden School of Business ( email )

Box 6550
Charlottesville, VA 22906-6550
United States
434-924-3434 (Phone)

HOME PAGE: http://faculty.darden.edu/allayannisy

Gregory W. Brown (Contact Author)

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Leora F. Klapper

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States
202-473-8738 (Phone)

HOME PAGE: http://econ.worldbank.org/staff/lklapper

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

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