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Institutional environment and capital structure : evidence on EU companies

LLSV (1997) recently opened a wide research avenue when they supported the idea that a sizeable chunk of economic and financial heterogeneity across countries stems from differences in legal origins. In line with this stream of literature, the present article gives evidence on the fact that corporate capital structures are substantially impacted by the legal systems in which they operate. To the best of our knowledge, it is one of the first study providing conclusive results with a statistical cross-country sample from ten Members of the European Union. Furthermore, the results give evidence on a clear cut between the smaller and the larger companies: the capital structures are impacted by the legal framework in both cases but in different ways: the smaller firms have a higher leverage capability in a legal environment oriented towards creditor rights. By contrast, the larger companies seem more prone to switch, in the same context, towards a more intense financing by own funds.