Xian Gu (Central University of Finance and Economics in China): How do creditor rights impact firm investments: Evidence from public debt market

Xian Gu (Central University of Finance and Economics in China): How do creditor rights impact firm investments: Evidence from public debt market

Abstract

In this paper, we examine how creditor protection affects firms' financing and investment decisions and the role of credit ratings in the public debt market. Using a firm-level dataset covering 63 developed and developing countries from 1989 through 2013, we find that in countries with stronger creditor rights, firms tend to have higher rating than those in countries with weaker protection. Moreover firms with higher ratings in countries with stronger creditor protections tend to have higher level of bond issuance relative to equity issuance and further have more investments. Additionally, improvements in creditor protection and rating promote capital expenditure more significantly for firms with severe agency conflicts and hence benefit particularly the public debtholders of those firms.

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