Judicial efficiency and capital structure: An international study
- Citation data:
Journal of Corporate Finance, ISSN: 0929-1199, Vol: 44, Page: 255-274
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- Business, Management and Accounting; Economics, Econometrics and Finance
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We investigate a particular aspect of creditor rights, judicial efficiency, and its influence on firms' corporate leverage in 69 countries. Increasing creditor rights makes credit more readily available due to greater loan supply, but firms use less leverage to avoid premature liquidation. We find that efficient judicial systems are associated with lower corporate leverage ratios. Managers perceive higher leverage in the presence of more efficient judicial systems as a serious threat to their jobs or private benefits continuing. Our results indicate that stronger creditor rights alone do not explain corporate leverage without taking into account efficient enforcement of these rights.