The Effect of State Laws on Capital Structure

Posted: 15 Feb 2006

See all articles by John K. Wald

John K. Wald

University of Texas at San Antonio

Michael S. Long

Rutgers University at Newark


We examine the impact of state laws on capital structure for a sample of U.S. manufacturing firms. Firms incorporated in states with stronger payout restrictions use less debt, while antitakeover statutes do not significantly reduce long-run leverage. Correcting for the endogenously determined choice of where to incorporate, we find that firms sort themselves according to state laws and capital structure needs. After accounting for self-selection, state antitakeover laws are positively associated with debt as a fraction of market value, possibly due to lower market values for these firms. State laws on payout restrictions appear to reduce leverage for firms that have not reincorporated outside their home states. Accounting for these constraints appears to explain part of the negative relationship between profitability and leverage.

Keywords: Leverage, State Laws, Profitability

JEL Classification: G32, K22

Suggested Citation

Wald, John K. and Long, Michael S., The Effect of State Laws on Capital Structure. Journal of Financial Economics (JFE), Forthcoming, Available at SSRN:

John K. Wald (Contact Author)

University of Texas at San Antonio ( email )

1 UTSA Circle
San Antonio, TX 78249
United States
210-458-6324 (Phone)

Michael S. Long

Rutgers University at Newark ( email )

111 Washington Avenue
Newark, NJ 07102
United States
973-353-5471 (Phone)

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