Do the differences in legal systems hinder international enterprises’ debt financing? |
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| Institution: | 1. School of Economics, Jinan University, Guangzhou 510630, China;2. School of Business Administration, South China University of Technology, Guangzhou 510640, China;1. Department of Finance and Accounting, University of Tunis El Manar and IFGT, Tunis, Tunisia;2. Department of Economics and Finance, College of Economics and Political Science, Sultan Qaboos University, Muscat, Oman;3. ISEG – Lisbon School of Economics and Management, SOCIUS/CSG – Research in Social Sciences and Management, Universidade de Lisboa, Rua Miguel Lupi, 20, 1249-078 Lisbon, Portugal;4. HSE University, Pokrovsky Blv. 11, 109028 Moscow, Russian Federation;5. PNU Business School, Pusan National University, Busan, South Korea;1. LUT Business School, LUT University, P.O. Box 20, FIN-53851 Lappeenranta, Finland;2. Schulich School of Business, York University, Toronto, ON M3J 1P3, Canada |
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| Abstract: | This study examines the impact of the differences in the legal system concerning obligation claim rights between host and multinational enterprises' (MNEs) home countries on bank credit financing by constructing a legal system distance index including four dimensions. Using 57,526 firm-year panel observations of 7,257 firms from 53 countries operating in China, the results find that legal system distance has a negative impact on foreign firms' debt financing. The influential mechanism is due to the increasing transaction costs. Further test finds that the negative effect declines as the cultural differences increase. The heterogeneity analysis finds that the negative impact of the legal system distance on the debt level is more pronounced for those foreign firms with a large scale, short operating age, not enough collateral, and sales in the domestic market, but shows no significant differences between a sole proprietorship and joint ventures. This study not only expands the literature on “Law and Finance” but also provides an implication for foreign firms' debt financing in the emerging host country. |
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| Keywords: | Legal system distance Multinational enterprises (MNEs) Debt financing Transaction costs Obligation claim rights F34 K40 |
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