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The signaling value of legal form in debt financing

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  • Felix Bracht
  • Jeroen Mahieu
  • Steven Vanhaverbeke

Abstract

We examine if a startup's legal form choice is used as a signal by credit providers to infer its risk to default on a loan. We propose that choosing a legal form with low minimum capital requirements signals higher default risk. Arguably, small relationship banks are more likely to use legal form as a screening device when deciding on a loan. Using data from Orbis and the IAB/ZEW Start-up Panel for a sample of German firms, we find evidence consistent with our hypotheses but inconsistent with predictions of several competing explanations, including differential demand for debt or growth opportunities.

Suggested Citation

  • Felix Bracht & Jeroen Mahieu & Steven Vanhaverbeke, 2022. "The signaling value of legal form in debt financing," POID Working Papers 052, Centre for Economic Performance, LSE.
    • Handle: RePEc:cep:poidwp:052
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    Keywords

    Legal form; Minimum Capital Requirements; Signaling; Access to Debt; Financial Constraint;
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