The signaling value of legal form in debt financing

Bracht, Felix, Mahieu, Jeroen and Vanhaverbeke, Steven (2023) The signaling value of legal form in debt financing. CEP Discussion Papers (CEPDP1914). London School of Economics and Political Science. Centre for Economic Performance, London, UK.

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Abstract

We examine if a startup's legal form choice is used as a signal by credit providers to infer its risk to default on a loan. We propose that choosing a legal form with low minimum capital requirements signals higher default risk. Arguably, small relationship banks are more likely to use legal form as a screening device when deciding on a loan. Using data from Orbis and the IAB/ZEW Start-up Panel for a sample of German firms, we find evidence consistent with our hypotheses but inconsistent with predictions of several competing explanations, including differential demand for debt or growth opportunities.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://cep.lse.ac.uk/_new/publications/discussion...
Additional Information:	© 2023 The Author(s)
Divisions:	Centre for Economic Performance
Subjects:	H Social Sciences > HC Economic History and Conditions K Law > K Law (General) H Social Sciences > HG Finance
JEL classification:	D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D80 - General G - Financial Economics > G3 - Corporate Finance and Governance > G30 - General M - Business Administration and Business Economics; Marketing; Accounting > M4 - Accounting and Auditing > M40 - General
Date Deposited:	15 Jan 2024 17:24
Last Modified:	16 Jan 2024 09:42
URI:	http://eprints.lse.ac.uk/id/eprint/121335

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