Legal Systems, Capital Structure, and Debt Maturity in Developing Countries

Manuscript type: Empirical Research Question/Issue: This paper analyzes the importance of two aspects of the legal system in shaping firm leverage and debt maturity structure across developing countries. Research Findings/Insights: Using a larger number of developing countries compared to prior research, four main findings are obtained. First, whereas corruption increases firm debt financing, its effect is moderated when considering the impact of stronger laws. Second, the common versus civil law distinction does matter for firm financing in developing countries, but in the opposite direction documented for developed countries. Third, less corruption combined with stronger laws increases reliance on long-term debt. Finally, by listing on a developed exchange abroad, firms in developing countries are able to raise equity and extend the maturity of their debt. Theoretical/Academic Implications: The findings on the relative importance of the legal system for firm financing decisions in developing countries do not necessarily agree with prior findings for developed countries. Future research focusing exclusively on developing countries may be warranted to better understand the drivers of private sector-led growth in these economies.