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The signaling value of legal form in entrepreneurial debt financing

Author

Listed:
  • Bracht, Felix
  • Mahieu, Jeroen
  • Vanhaverbeke, Steven

Abstract

This study examines the impact of mandatory legal form choices on startups' debt financing opportunities. We posit that an entrepreneur's initial legal form decision serves as a reliable signal to outside lenders, reducing adverse selection concerns. Using data from German startups, we find that limited liability companies with low capital requirements disproportionately secure less debt than their high-capital counterparts. This financing disparity is particularly pronounced for younger firms in areas dominated by small relationship banks, but it diminishes with firm age. Our findings highlight the unintended consequences of recent global deregulation efforts.

Suggested Citation

  • Bracht, Felix & Mahieu, Jeroen & Vanhaverbeke, Steven, 2024. "The signaling value of legal form in entrepreneurial debt financing," Journal of Business Venturing, Elsevier, vol. 39(3).
    • Handle: RePEc:eee:jbvent:v:39:y:2024:i:3:s0883902624000028
    DOI: 10.1016/j.jbusvent.2024.106380
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    More about this item

    Keywords

    Legal form; Minimum capital requirements; Signaling; Access to debt; Financial constraints;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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