## _wp1538 - References

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### I. Introduction — scope and objectives
- Focus: effect of laws and institutions on firm financial decisions and investment outcomes in developing countries.
- Corporate variables analyzed:
  - Financial decisions: Total Debt and Short Term Debt (ratios to total assets).
  - Investment outcomes: earnings volatility proxied by Risk 1 and Risk 2.
- Institutional variables:
  - Legal environment: legal origin (Common vs Civil) and judicial efficiency (Legal Formalism).
  - Investor protection: Creditor Rights and Shareholder Rights.
- Sample and data coverage:
  - 2,107 nonfinancial firms across 23 developing countries.
  - 10,600 firm-year observations for fiscal years 1997-2007.
  - Financial data source: Thomson DataStream Advance 4.0.
- Four main findings:
  - Firms in civil legal origin countries rely more on debt financing and exhibit lower earnings volatility.
  - When judicial enforcement is weak (high legal formalism), firms borrow more but curb risk taking.
  - Stronger creditor rights increase debt financing and reduce earnings volatility.
  - Listing on a developed exchange shifts capital structure toward equity and increases firms’ ability to borrow when judicial enforcement is inefficient.

### II. Literature review and hypotheses
- Theoretical and empirical foundation: builds on La Porta, Lopez-de-Silanes, Shleifer and Vishny (LLSV, 1997, 1998, 2002) and subsequent law-and-finance literature; distinguishes legal origin effects from judicial efficiency and investor protection mechanisms.
- Hypotheses:
  - Hypothesis 1: Firms in common legal origin developing countries rely more on debt financing and experience greater earnings volatility than firms in civil origin developing countries.
  - Hypothesis 2: When legal formalism is high (judicial efficiency low), firms contract more debt but reduce earnings volatility.
  - Hypothesis 3: Better creditor rights increase borrowing and induce risk-reducing (potentially inefficient) investment behavior.
  - Hypothesis 4: Better shareholder protection encourages more debt and reduces earnings volatility.

### III. Empirical design, variables, and sample characteristics
- Variable construction:
  - Total Debt = total interest-bearing and capitalized lease obligations / total assets (TA).
  - Short Term Debt = short-term debt / TA.
  - Risk 1 = standard deviation of EBITDA/TA (requires at least five years of firm data).
  - Risk 2 = standard deviation of pretax ROA (requires at least five years of firm data).
  - Legal Formalismc = number of days to collect on a bounced check and to evict a nonpaying tenant (DLLS, 2003); larger values imply less efficient judicial system.
  - Creditor Rights = LLSV (1998) Creditor Rights index (higher = better protection).
  - Shareholder Rights = revised DLLS (2008) anti-directors’ rights index (higher = better protection).
- Controls:
  - Firm-level: Asset Tangibility (tangible assets/TA), Profitability (pretax ROA), Tax Rate (taxes/pretax income), Firm Size (ln TA), Market-to-Book (market cap / book equity).
  - Country-level: GDP per capita, real GDP growth rate.
- Sample notes and summary statistics:
  - Sample almost evenly split across common and civil legal origin countries.
  - Average Total Debt is twice average Short Term Debt.
  - Risk 1 variability is about twice Risk 2.
  - Firms on average have Asset Tangibility = 41.66%.
  - Correlations:
    - Risk 1 and Risk 2 correlation = 0.637.
    - Legal Formalism correlates with Debt (0.054) and negatively with Risk 1 and Risk 2 (-0.139 each).
    - Legal origin correlates with Creditor Rights (-0.469) and Shareholder Rights (-0.447) for civil vs common.

### IV. Methodology
- Baseline model (Equation 1): Corporate Choicei = β1 Civilc + β2 Legal Formalismc + β3 Investor Protectionc + β4 Fi + β5 Zc + εj
  - Corporate Choicei: Total Debt, Short Term Debt, Risk 1, Risk 2.
  - Fi: firm-level controls; Zc: country-level controls.
- Estimation approaches:
  - Leverage regressions (Total Debt, Short Term Debt): firm random effects with robust standard errors clustered at the country level.
  - Risk regressions (Risk 1, Risk 2): pooled cross-country regressions weighted by inverse of number of firms in each country; standard errors clustered at the country level.
  - Lagged firm controls used for leverage regressions; leverage included as a control in risk regressions.
- Identification and inference:
  - Institutional variables do not vary within countries; clustering at country level used.
  - Potential omitted variables, endogeneity, measurement error acknowledged and addressed in robustness checks.

### V. Baseline multivariate findings — financial decisions and investment outcomes
- Financial decisions (selected coefficients and signs):
  - Civil (vs Common): positive and statistically significant coefficient → higher proportion of assets financed with debt.
  - Legal Formalism: positive and significant → higher legal formalism associates with greater debt financing, especially for Short Term Debt.
  - Creditor Rights: positive and highly significant → stronger creditor rights encourage more borrowing, with larger economic significance for Short Term Debt.
  - Shareholder Rights: insignificant and sign sensitive when accounting for debt maturity.
  - Asset Tangibility: negative association with debt financing in this sample.
  - Profitability: higher profitability reduces reliance on external debt.
  - Market-to-Book: higher market-to-book reduces Short Term Debt.
  - Firm Size: large firms borrow more, especially long term.
  - GDP per capita: higher GDP per capita increases firm debt financing.
- Investment outcomes (selected coefficients and signs):
  - Civil legal origin: firms exhibit lower earnings volatility compared to common law firms (more pronounced for Risk 1).
  - Legal Formalism: negative and highly significant → weaker judicial enforcement associates with lower earnings volatility (firms are more cautious in investment).
  - Creditor Rights: negative and significant → stronger creditor rights reduce earnings volatility.
  - Shareholder Rights: insignificant in baseline risk regressions.
  - Leverage: greater debt financing increases earnings volatility.
  - Profitability and firm size: more profitable and larger firms experience less earnings volatility.

### VI. Model extension — role of exchange listing
- Exchange listing coverage:
  - Firms listed across 50 exchanges, 15 domiciled in developed countries.
  - 350 of 2,107 firms trade on an exchange located in a developed country (16.61% of sample firms).
- Developed Exchange dummy (1 if firm listed on developed-country exchange):
  - Developed Exchange → negative and significant coefficient on Total Debt: listing on developed exchange shifts capital structure toward equity.
  - Developed Exchange → positive and highly significant coefficients in investment outcomes regressions: listing on developed exchange associates with greater earnings volatility.
- Interaction effects (Developed Exchange * institutional variables):
  - Shareholder Rights: when controlling for Developed Exchange, Shareholder Rights becomes positive and marginally significant (10%) for Total Debt; interaction Developed Exchange * Shareholder Rights is negative and significant (5%), yielding an overall negative total effect on Total Debt for listed firms.
  - Legal Formalism: positive relationship between legal formalism and Total Debt is accentuated for firms listed on developed exchanges; Developed Exchange * Legal Formalism attenuates the negative effect of legal formalism on investment outcomes (listed firms increase risk tolerance and earnings volatility under weak enforcement).

### VII. Robustness checks and identification
- Instrumental variables / endogeneity:
  - Instruments for legal origin: International Country Risk Guide Law and Order variable and Regulatory Quality (World Bank).
  - Two-stage least squares (2SLS) results: main findings hold though significance weakens (Table 11).
- Orthogonalization:
  - Orthogonalized Creditor Rights and Legal Formalism due to strong negative correlation; main findings maintained (Table 12).
- Alternative shareholder protection proxy:
  - Replaced Shareholder Rights with Anti-Self-Dealing Index (DLLS, 2008); qualitative findings maintained (Table 13).
- Sector heterogeneity:
  - Results may be sector-dependent; sector-level tests indicate laws and institutions’ importance varies by sector but main findings generally hold.

### VIII. Policy-relevant implications and conclusions
- Key implications:
  - Legal origin, judicial enforcement, and investor protection significantly shape corporate capital structure and risk-taking in developing countries.
  - Weak judicial enforcement (high legal formalism) correlates with higher firm leverage but lower earnings volatility due to restrained investment activity.
  - Strong creditor rights raise debt financing yet reduce earnings volatility, consistent with the “dark side” of creditor rights.
  - Listing on developed exchanges shifts firms toward equity financing and increases earnings volatility; it also amplifies firms’ ability to borrow under weak judicial enforcement.
- Policy recommendations:
  - Strengthen laws and institutions and improve judicial efficiency in developing countries to foster better financing conditions and investment outcomes.
  - Deepen capital markets to provide alternative financing channels and influence corporate risk-taking and capital structure choices.
- Final summary:
  - Laws and institutions matter for corporate financing and investment decisions in developing countries; reforms to investor protection, judicial efficiency, and market development can affect firm-level debt use and investment risk.

### IX. Key descriptive statistics and selected regression coefficients (exact values from source)
- Selected means and ranges (Table 3):
  - Legal Formalism: Mean 3.76, Std. Dev. 0.73, Min 2.64, Max 5.19.
  - Creditor Rights: Mean 2.08, Std. Dev. 0.93, Min 0, Max 4.
  - Shareholders Rights: Mean 4.43, Std. Dev. 0.76, Min 1, Max 5.
  - Total Debt to Total Assets: Mean 32.20, Std. Dev. 17.24, Min 0, Max 95.47.
  - Short Term Debt to Total Assets: Mean 15.88, Std. Dev. 13.75, Min 0, Max 86.55.
  - Risk 1: Mean 7.68, Std. Dev. 10.47, Min 0.42, Max 267.15.
  - Risk 2: Mean 6.89, Std. Dev. 5.49, Min 0, Max 38.50.
  - Firm Size (log total assets): Mean 12.00, Std. Dev. 2.04, Min 2.77, Max 24.13.
  - Real GDP Growth: Mean 4.83, Std. Dev. 2.87, Min -13.13, Max 18.29.
  - Ln(GDPPC): Mean 8.14, Std. Dev. 0.92, Min 5.74, Max 9.89.
- Selected regression coefficients (Table 5, Table 6, Table 7, Table 9, Table 10, Table 11, Table 12, Table 13):
  - Table 5, Panel A (Total Debt), Model 1:
    - Civil: 6.751 (standard error 3.000)**.
    - Legal Formalism: 4.293 (1.757)**.
    - Creditor Rights: 5.849 (1.312)***.
    - Profitability: -0.287 (0.034)***.
    - Firm Size: 2.053 (0.639)***.
    - Real GDP Growth: -0.546 (0.208)***.
    - Ln(GDPPC): -5.758 (0.930)***.
  - Table 5, Panel B (Short Term Debt), Model 1:
    - Civil: 6.346 (1.845)***.
    - Legal Formalism: 4.808 (1.170)***.
    - Creditor Rights: 6.304 (1.190)***.
    - Asset Tangibility: -0.073 (0.011)***.
    - Profitability: -0.198 (0.050)***.
    - Market-to-Book: -0.002 (0.001)**.
  - Table 6 (Risk 1), Panel A (Leverage = Total Debt), Model 1:
    - Civil: -4.493 (1.767)**.
    - Legal Formalism: -4.668 (1.316)***.
    - Creditor Rights: -3.456 (1.513)**.
    - Leverage coefficient: 0.110 (0.049)**.
    - Profitability: -0.307 (0.146)**.
    - Ln(GDPPC): 2.647 (1.001)**.
  - Table 7 (Risk 2), Panel A (Leverage = Total Debt), Model 1:
    - Civil: -1.896 (1.002)*.
    - Legal Formalism: -2.955 (0.638)***.
    - Creditor Rights: -2.066 (0.574)***.
    - Leverage: 0.071 (0.025)**.
    - Profitability: -0.240 (0.055)***.
  - Table 9 (Developed Exchange effects):
    - Developed Exchange on Total Debt: -2.735 (1.085)**.
    - Developed Exchange on Risk 1: 2.627 (1.030)**.
    - Developed Exchange on Risk 2: 1.832 (0.697)***.
  - Table 10 (Interaction examples):
    - Developed Exchange * Legal Formalism for Total Debt: 2.741 (1.180)**.
    - Developed Exchange * Shareholder Rights for Total Debt: -3.032 (1.319)**.
  - Table 11 (2SLS examples, Total Debt):
    - Civil: 21.892 (13.689) (not conventionally significant).
    - Legal Formalism: 11.577 (6.397)*.
    - Creditor Rights: 12.329 (6.069)**.
    - First Stage F test p-value: 0.000.
    - Sargan-Hansen p-value (example): 0.1518.
  - Table 12 (Orthogonalized Legal Formalism):
    - Legal Formalism Orthogonalized on Total Debt: 3.131 (0.707)***.
    - Legal Formalism Orthogonalized on Short Term Debt: 3.506 (0.510)***.
  - Table 13 (Anti-self-dealing specification):
    - Creditor Rights on Total Debt: 7.837 (1.562)***.
    - Example Shareholder Rights sensitivity: -8.163 (4.532)* for Total Debt in one specification.

### X. Sample composition and exchange distribution
- Exchange listing distribution (Table 8) highlights top frequencies:
  - Bombay 246 (11.68 percent).
  - KOSDAQ 211 (10.01 percent).
  - Malaysia combined entries 364 (17.27 percent): Kuala Lumpur 183 (8.69), Kuala Lumpur 2nd. Board 117 (5.55), Kuala Lumpur MESDAQ 57 (2.71).
  - Sao Paulo 168 (7.98 percent).
  - Bangkok 127 (6.03 percent).
- Country-level sample counts (Appendix) (Number of Firms / Number of Observations):
  - India: 338 / 1203.
  - Malaysia: 364 / 1661.
  - Korea: 313 / 1308.
  - Brazil: 206 / 1334.
  - South Africa: 233 / 1269.
  - Other country counts reported for 23 countries.

*Source: content unit provided from _wp1538 - References .............................................................................................................*

### References

### _wp1538 - References

### References
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*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2015/_wp1538.pdf*

### References .............................................................................................................

### _wp1538 - References .............................................................................................................

### I. Introduction — scope and objectives
- Focus: effect of laws and institutions on firm financial decisions and investment outcomes in developing countries.
- Key corporate variables analyzed:
  - Financial decisions: Total Debt and Short Term Debt (ratios to total assets).
  - Investment outcomes: earnings volatility proxied by Risk 1 and Risk 2.
- Institutional variables grouped into:
  - Legal environment: legal origin (Common vs Civil) and judicial efficiency (Legal Formalism).
  - Investor protection: Creditor Rights and Shareholder Rights.
- Sample and data coverage:
  - 2,107 nonfinancial firms across 23 developing countries.
  - 10,600 firm-year observations for fiscal years 1997-2007.
  - Financial data source: Thomson DataStream Advance 4.0.
- Four main stated findings:
  - Firms in civil legal origin countries rely more on debt financing and exhibit lower earnings volatility.
  - When judicial enforcement is weak (high legal formalism), firms borrow more but curb risk taking.
  - Stronger creditor rights increase debt financing and reduce earnings volatility.
  - Listing on a developed exchange shifts capital structure toward equity and increases firms’ ability to borrow when judicial enforcement is inefficient.

### II. Literature review and hypotheses
- Theoretical and empirical foundations:
  - Builds on La Porta, Lopez-de-Silanes, Shleifer and Vishny (LLSV, 1997, 1998, 2002) and subsequent law-and-finance literature.
  - Distinguishes legal origin effects from judicial efficiency and investor protection mechanisms.
- Formulated hypotheses:
  - Hypothesis 1: Firms in common legal origin developing countries rely more on debt financing and experience greater earnings volatility than firms in civil origin developing countries.
  - Hypothesis 2: When legal formalism is high (judicial efficiency low), firms contract more debt but reduce earnings volatility.
  - Hypothesis 3: Better creditor rights increase borrowing and induce risk-reducing (potentially inefficient) investment behavior.
  - Hypothesis 4: Better shareholder protection encourages more debt and reduces earnings volatility.

### III. Empirical design, variables, and sample characteristics
- Key variable construction:
  - Total Debt = total interest-bearing and capitalized lease obligations / total assets (TA).
  - Short Term Debt = short-term debt / TA.
  - Risk 1 = standard deviation of EBITDA/TA (requires at least five years of firm data).
  - Risk 2 = standard deviation of pretax ROA (requires at least five years of firm data).
  - Legal Formalismc = number of days to collect on a bounced check and to evict a nonpaying tenant (DLLS, 2003); larger values imply less efficient judicial system.
  - Creditor Rights = LLSV (1998) Creditor Rights index (higher = better protection).
  - Shareholder Rights = revised DLLS (2008) anti-directors’ rights index (higher = better protection).
- Controls included:
  - Firm-level: Asset Tangibility (tangible assets/TA), Profitability (pretax ROA), Tax Rate (taxes/pretax income), Firm Size (ln TA), Market-to-Book (market cap / book equity).
  - Country-level: GDP per capita, real GDP growth rate.
- Sample notes and summary statistics:
  - Sample almost evenly split across common and civil legal origin countries.
  - Average Total Debt is twice average Short Term Debt.
  - Risk 1 variability is about twice Risk 2.
  - Firms on average have Asset Tangibility = 41.66%.
  - Correlation highlights:
    - Risk 1 and Risk 2 correlation = 0.637.
    - Legal Formalism correlates with Debt (0.054) and negatively with Risk 1 and Risk 2 (-0.139 each).
    - Legal origin correlates with Creditor Rights (-0.469) and Shareholder Rights (-0.447) for civil vs common.

### IV. Methodology
- Baseline model (Equation 1): Corporate Choicei = β1 Civilc + β2 Legal Formalismc + β3 Investor Protectionc + β4 Fi + β5 Zc + εj
  - Corporate Choicei: Total Debt, Short Term Debt, Risk 1, Risk 2.
  - Fi: firm-level controls; Zc: country-level controls.
- Estimation approaches:
  - Leverage regressions (Total Debt, Short Term Debt): firm random effects with robust standard errors clustered at the country level.
  - Risk regressions (Risk 1, Risk 2): pooled cross-country regressions weighted by inverse of number of firms in each country; standard errors clustered at the country level.
  - Lagged firm controls used for leverage regressions; leverage included as a control in risk regressions.
- Identification and inference considerations:
  - Key institutional variables do not vary within countries; clustering at country level used.
  - Acknowledged potential for omitted variables, endogeneity, measurement error; addressed in robustness checks.

### V. Baseline multivariate findings — financial decisions and investment outcomes
- Financial decisions (Total Debt and Short Term Debt):
  - Civil (vs Common): positive and statistically significant coefficient → firms in civil legal origin countries finance a higher proportion of assets with debt.
  - Legal Formalism: positive and significant → higher legal formalism (weaker judicial efficiency) associates with greater debt financing, especially for Short Term Debt.
  - Creditor Rights: positive and highly significant → stronger creditor rights encourage more borrowing, with larger economic significance for Short Term Debt.
  - Shareholder Rights: coefficient insignificant and changes sign when accounting for debt maturity.
  - Asset Tangibility: negative association with debt financing in this sample.
  - Profitability: higher profitability reduces reliance on external debt.
  - Market-to-Book: higher market-to-book reduces Short Term Debt.
  - Firm Size: large firms borrow more, especially long term.
  - GDP per capita: higher GDP per capita increases firm debt financing.
- Investment outcomes (Risk 1 and Risk 2):
  - Civil legal origin: firms exhibit lower earnings volatility compared to common law firms (more pronounced for Risk 1).
  - Legal Formalism: negative and highly significant → weaker judicial enforcement associates with lower earnings volatility (firms are more cautious in investment).
  - Creditor Rights: negative and significant → stronger creditor rights reduce earnings volatility (supports “dark side” of creditor rights).
  - Shareholder Rights: insignificant in baseline risk regressions.
  - Leverage: greater debt financing increases earnings volatility.
  - Profitability and firm size: more profitable and larger firms experience less earnings volatility.

### VI. Model extension — role of exchange listing
- Exchange listing coverage:
  - Firms listed across 50 exchanges, 15 domiciled in developed countries.
  - 350 of 2,107 firms trade on an exchange located in a developed country (16.61% of sample firms).
- Developed Exchange dummy (1 if firm listed on developed-country exchange):
  - Developed Exchange → negative and significant coefficient on Total Debt: listing on developed exchange shifts capital structure toward equity.
  - Developed Exchange → positive and highly significant coefficients in investment outcomes regressions: listing on developed exchange associates with greater earnings volatility.
- Interaction effects (Developed Exchange * institutional variables):
  - Shareholder Rights: when controlling for Developed Exchange, Shareholder Rights becomes positive and marginally significant (10%) for Total Debt; interaction Developed Exchange * Shareholder Rights is negative and significant (5%), yielding an overall negative total effect on Total Debt for listed firms (capital structure shifts to equity).
  - Legal Formalism: positive relationship between legal formalism and Total Debt is accentuated for firms listed on developed exchanges (using Total Debt); Developed Exchange * Legal Formalism attenuates the negative effect of legal formalism on investment outcomes (listed firms increase risk tolerance and earnings volatility under weak enforcement).

### VII. Robustness checks and identification
- Instrumental variables / endogeneity:
  - Two instruments for legal origin: International Country Risk Guide Law and Order variable and Regulatory Quality (World Bank).
  - Two-stage least squares (2SLS) results reported in Table 11: main findings hold though significance weakens.
- Orthogonalization:
  - Orthogonalized Creditor Rights and Legal Formalism due to strong negative correlation; main findings maintained (Table 12).
- Alternative shareholder protection proxy:
  - Replaced Shareholder Rights with Anti-Self-Dealing Index (DLLS, 2008); qualitative findings maintained (Table 13).
- Sector heterogeneity:
  - Results may be sector-dependent; sector-level tests (not shown) indicate laws and institutions’ importance varies by sector but main findings generally hold.

### VIII. Policy-relevant implications and conclusions
- Key implications:
  - Legal origin, judicial enforcement, and investor protection significantly shape corporate capital structure and risk-taking in developing countries.
  - Weak judicial enforcement (high legal formalism) correlates with higher firm leverage but lower earnings volatility due to restrained investment activity.
  - Strong creditor rights raise debt financing yet reduce earnings volatility, consistent with the “dark side” of creditor rights.
  - Listing on developed exchanges shifts firms toward equity financing and increases earnings volatility; it also amplifies firms’ ability to borrow under weak judicial enforcement.
- Policy recommendations (derived from conclusions):
  - Strengthen laws and institutions and improve judicial efficiency in developing countries to foster better financing conditions and investment outcomes.
  - Deepen capital markets to provide alternative financing channels and influence corporate risk-taking and capital structure choices.
- Final summary statement:
  - Laws and institutions matter for corporate financing and investment decisions in developing countries; reforms to investor protection, judicial efficiency, and market development can affect firm-level debt use and investment risk.

*Italicized source: content unit provided from _wp1538 - References .............................................................................................................*

### References

### References

### Key empirical literature cited
- Major works on creditor and shareholder rights, law and finance, corporate governance, and capital structure, including (exact citations as listed):
  - Acharya, V., Y. Amihud, I. Litov, 2011, Creditor rights and corporate risk-taking, Journal of Financial Economics 102, 150-166.
  - La Porta, R., F. Lopez-de-Silanes, A. Shleifer, R. Vishny, 1997, Legal determinants of external finance, The Journal of Finance 52, 1131-1150.
  - La Porta, R., F. Lopez-de-Silanes, A. Shleifer, R. Vishny, 1998, Law and finance, The Journal of Political Economy 106, 1113-1155.
  - La Porta, R., F. Lopez-de-Silanes, A. Shleifer, R. Vishny, 2002, Investor protection and corporate valuation, The Journal of Finance 57, 1147-1170.
  - Djankov, S., R. La Porta, F. Lopez-de-Silanes, A. Shleifer, 2003, Courts, Quarterly Journal of Economics 118, 453-517.
  - Djankov, S., Hart, O., C. McLiesh, A. Shleifer, 2008, Debt enforcement around the world, Journal of Political Economy 116, 1105-1149.
  - Demirguc-Kunt, A., V. Maksimovic, 1998, Law, finance, and firm growth, Journal of Finance 53, 2107-2137.
  - Numerous other empirical and theoretical works on capital structure, investor protection, legal origin, and judicial efficiency are listed.

### Variables definition (Table 1)
- Financial decisions:
  - Total Debt: Ratio of total debt to total assets. Total debt represents all interest-bearing and capitalized lease obligations. It is the sum of long and short term debt. (Author’s calculations)
  - Short Term Debt: Ratio of short term debt to total assets. (Author’s calculations)
- Investment outcomes:
  - Risk 1: Volatility of earnings before interest, taxes, depreciation, and amortization (EBITDA) scaled by total assets (TA); calculated as the standard deviation of the ratio of EBITDA to total assets for firm i in country c at time t, where T≥5. (Author’s calculations)
  - Risk 2: Volatility of pretax income (PTI) scaled by total assets, calculated analogously for T≥5. (Author’s calculations)
- Institutional variables:
  - Legal Origin: identifies the legal origin of company law or commercial code: Common or Civil Law. (DLLS (2003) and DMS (2007))
  - Judicial Efficiency / Legal Formalism: estimate of the number of days necessary to collect on a bounced check and to evict a tenant for nonpayment of rent before the courts in the country’s largest city. Higher values indicate worse judicial enforcement. (DLLS (2003))
- Investor protection variables:
  - Creditor Rights: index ranges from zero to four, with higher values indicating stronger creditors’ rights. (DMS (2007))
  - Shareholder Rights: anti-director rights index ranges from 0 – 6, where zero represents the weakest anti-director rights and 6 the strongest. (DLLS (2008))
- Firm-level controls (sources: Thomson DataStream Advance 4.0): Asset Tangibility; Profitability (pretax income/TA); Tax Rate (taxes/pretax income); Market-to-Book; Firm Size (log total assets).
- Country-level controls: Per Capita GDP (Logarithm), Real GDP Growth (International Financial Statistics).

### Descriptive statistics and tests (Tables 2–4)
- Sample and coverage:
  - Sample period: 1997-2007.
  - Countries: 23 developing countries.
  - Observations (Table 3): Common (Obs. 10600), Civil (Obs. 10600), Total Debt to Total Assets (Obs. 9902), Short Term Debt to Total Assets (Obs. 9902), Risk 1 (Obs. 7757), Risk 2 (Obs. 7374).
- Selected means and ranges (Table 3):
  - Legal Formalism: Mean 3.76, Std. Dev. 0.73, Min 2.64, Max 5.19.
  - Creditor Rights: Mean 2.08, Std. Dev. 0.93, Min 0, Max 4.
  - Shareholders Rights: Mean 4.43, Std. Dev. 0.76, Min 1, Max 5.
  - Total Debt to Total Assets: Mean 32.20, Std. Dev. 17.24, Min 0, Max 95.47.
  - Short Term Debt to Total Assets: Mean 15.88, Std. Dev. 13.75, Min 0, Max 86.55.
  - Risk 1: Mean 7.68, Std. Dev. 10.47, Min 0.42, Max 267.15.
  - Risk 2: Mean 6.89, Std. Dev. 5.49, Min 0, Max 38.50.
  - Firm Size (log total assets): Mean 12.00, Std. Dev. 2.04, Min 2.77, Max 24.13.
  - Real GDP Growth: Mean 4.83, Std. Dev. 2.87, Min -13.13, Max 18.29.
  - Ln(GDPPC): Mean 8.14, Std. Dev. 0.92, Min 5.74, Max 9.89.
- Tests of differences in means (Table 2):
  - Common vs. Civil legal origin:
    - Total Debt: Common 32.096, Civil 32.299 (p-value 0.242).
    - Short Term Debt: Common 16.163, Civil 15.584 (p-value 0.004).
    - Risk 1: Common 7.391, Civil 7.969 (p-value 0.008).
    - Risk 2: Common 6.527, Civil 7.228 (p-value 0.000).
  - Legal Formalism split at median:
    - Below Median Total Debt 32.041, Above Median 32.362 (p-value 0.135).
    - Short Term Debt Below 15.244, Above 16.541 (p-value 0.000).
    - Risk 1 Below 8.805, Above 6.682 (p-value 0.000).
    - Risk 2 Below 7.289, Above 6.546 (p-value 0.000).
  - Creditor Rights split at median:
    - Total Debt Below Median 33.935, Above Median 29.648 (p-value 0.000).
    - Short Term Debt Below 15.090, Above 17.027 (p-value 0.000).
    - Risk 1 Below 7.162, Above 8.492 (p-value 0.000).
    - Risk 2 Below 6.800, Above 7.040 (p-value 0.033).
  - Shareholder Rights split at median:
    - Total Debt Below Median 34.027, Above Median 30.498 (p-value 0.000).
    - Short Term Debt Below Median 17.633, Above Median 14.243 (p-value 0.000).
    - Risk 1 and Risk 2 differences not significant at conventional levels (p-values 0.391 and 0.182).
- Pairwise correlations (Table 4): selected significant correlations preserved in table (e.g., Creditor Rights correlated -0.669* with Legal Formalism; many firm- and country-level correlations reported with '*' indicating significance at the 5% level).

### Regression results: Institutional arrangements and financial decisions (Tables 5, 11, 12, 13)
- Main random effects results (Table 5):
  - Panel A (Total Debt), Model 1:
    - Civil: 6.751 (standard error 3.000)**.
    - Legal Formalism: 4.293 (1.757)**.
    - Creditor Rights: 5.849 (1.312)***.
    - Shareholder Rights: 0.934 (1.173) (not significant).
    - Profitability: -0.287 (0.034)***.
    - Firm Size: 2.053 (0.639)***.
    - Real GDP Growth: -0.546 (0.208)***.
    - Ln(GDPPC): -5.758 (0.930)***.
  - Panel B (Short Term Debt), Model 1:
    - Civil: 6.346 (1.845)***.
    - Legal Formalism: 4.808 (1.170)***.
    - Creditor Rights: 6.304 (1.190)***.
    - Asset Tangibility: -0.073 (0.011)***.
    - Profitability: -0.198 (0.050)***.
    - Market-to-Book: -0.002 (0.001)**.
- Two-stage least squares (Table 11) (instrumenting legal origin using International Country Risk Guide Law and Order and World Bank Regulatory Quality):
  - Total Debt (first-stage/IV-adjusted coefficients reported):
    - Civil: 21.892 (13.689) (not conventionally significant).
    - Legal Formalism: 11.577 (6.397)*.
    - Creditor Rights: 12.329 (6.069)**.
    - Diagnostics: First Stage F test p-value 0.000; Sargan-Hansen p-value reported (e.g., 0.1518 for Total Debt), Kleibergen-Paap Rank p-value 0.000.
- Orthogonalizing Legal Formalism with Creditor Rights (Table 12):
  - Legal Formalism Orthogonolized remains positive for financial decisions:
    - Total Debt: 3.131 (0.707)***.
    - Short Term Debt: 3.506 (0.510)***.
- Anti-self-dealing specification (Table 13):
  - Creditor Rights and Legal Formalism continue to show positive associations with Total Debt and Short Term Debt:
    - Creditor Rights: 7.837 (1.562)*** for Total Debt.
    - Shareholder Rights show negative and heterogeneous coefficients in some specifications (e.g., Shareholder Rights -8.163 (4.532)* for Total Debt in one specification), indicating sensitivity to alternate measures of investor protection.

### Regression results: Institutional arrangements and investment outcomes (Tables 6–7, 9–10)
- Using Risk 1 (volatility of EBITDA/Assets) (Table 6):
  - Panel A (Leverage = Total Debt), Model 1:
    - Civil: -4.493 (1.767)**.
    - Legal Formalism: -4.668 (1.316)***.
    - Creditor Rights: -3.456 (1.513)**.
    - Leverage coefficient: 0.110 (0.049)**.
    - Profitability: -0.307 (0.146)**.
    - Ln(GDPPC): 2.647 (1.001)**.
  - Panel B (Leverage = Short Term Debt), Model 1:
    - Leverage coefficient: 15.433 (6.197)**.
    - Civil, Legal Formalism, Creditor Rights: negative and significant coefficients on Risk 1.
- Using Risk 2 (volatility of pretax ROA) (Table 7):
  - Panel A (Leverage = Total Debt), Model 1:
    - Civil: -1.896 (1.002)*.
    - Legal Formalism: -2.955 (0.638)***.
    - Creditor Rights: -2.066 (0.574)***.
    - Leverage: 0.071 (0.025)**.
    - Profitability: -0.240 (0.055)***.
  - Panel B (Leverage = Short Term Debt), Model 1:
    - Leverage: 0.109 (0.028)***.
    - Legal Formalism and Creditor Rights: negative and significant.
- Effect of exchange listing (Tables 9–10):
  - Developed Exchange (dummy = 1 if listed on an exchange in a developed country) shows:
    - Negative association with Total Debt: -2.735 (1.085)**.
    - Positive association with Risk 1 and Risk 2 in some specifications: Risk 1 coefficient 2.627 (1.030)**, Risk 2 coefficient 1.832 (0.697)*** (Table 9).
  - Interaction terms (Table 10) show heterogeneous effects of Developed Exchange by institutional variables:
    - Developed Exchange * Legal Formalism: 2.741 (1.180)** for Total Debt; positive interactions for Risk 1 and Risk 2 are reported with varying significance.
    - Developed Exchange * Shareholder Rights: -3.032 (1.319)** for Total Debt (interaction).

### Additional model features and robustness
- Estimation details:
  - Random effects regressions with robust standard errors clustered by country (financial decisions).
  - Investment outcomes regressions weighted by inverse of number of firms per country.
  - Industry and year effects included in many specifications; some investment outcome regressions omit year effects.
  - Number of firms and observations vary by specification; examples:
    - Number of Firms in main Financial Decisions regressions: 5,917 (Model 1).
    - Number of Observations in main Financial Decisions regressions: 1,411 (Model 1).
    - Firms used for Risk 1 regressions: 587 (Model 1) and 584 (Model 2).
- Robustness checks:
  - Excluding countries with fewer than 10 firms (Model 2) yields qualitatively similar coefficients.
  - Instrumental variables (Table 11) and orthogonalization (Table 12) used to address endogeneity concerns.
  - Alternative investor protection measures (anti-self-dealing) reported (Table 13).

### Firm distribution by exchange and sample composition (Table 8 and Appendix)
- Exchange listing distribution (Table 8): Total firms listed = 2,107 across numerous exchanges; top frequencies include:
  - Bombay 246 (11.68 percent)
  - KOSDAQ 211 (10.01 percent)
  - Malaysia 364 (17.27 percent across Kuala Lumpur combined entries: Kuala Lumpur 183 (8.69), Kuala Lumpur 2nd. Board 117 (5.55), Kuala Lumpur MESDAQ 57 (2.71))
  - Sao Paulo 168 (7.98 percent)
  - Bangkok 127 (6.03 percent)
- Country-level sample counts (Appendix):
  - India: Number of Firms 338, Number of Observations 1203.
  - Malaysia: Number of Firms 364, Number of Observations 1661.
  - Korea: Number of Firms 313, Number of Observations 1308.
  - Brazil: Number of Firms 206, Number of Observations 1334.
  - South Africa: Number of Firms 233, Number of Observations 1269.
  - Other country counts reported for 23 countries (e.g., Argentina 17/107; Chile 46/323; Mexico 77/578; Thailand 191/1088; etc.).

*References and empirical tables as presented in the source PDF.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2015/_wp1538.pdf_