The influence of the legalsystem on capital structure

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Previous research suggests that capital structure is determined by firm specific and country specific factors. The most important firm specific factors are firm size, growth opportunities, tangibility and earnings volatility. This study focuses on the effect the legal system has on the firm specific factors that determine capital structure. Four samples are used to compare French Civil law, Scandinavian Civil law, German Civil law and Civil law to Common law. T-tests confirm that leverage is lower in Common law countries than in Civil law countries. Xttobit regressions are used to measure the interaction effect. Since leverage is a ratio between 0 and 100, left and right censoring is used. The interaction terms show contrasting results. We therefore cannot confirm nor deny that the firm specific factors have a stronger effect on leverage in Common law countries compared to Civil law countries. The main finding of this research is that the legal system does influence the effect of firm specific factors on leverage. However the three types of civil law should not be considered as one legal system. Further research should focus on the actual differences between the types of Civil law.
Faculteit der Managementwetenschappen