Legal environment, capital structure and firm growth: international evidence from industry data

This paper investigates the effects that economic regulations have on firm growth. There is substantial evidence of a positive relationship between the level of financial development and economic growth. Little is known, about the role played by the legal structure affecting firm decision making on growth. We analyse banking regulation, disclosure requirements, company and bankruptcy laws, accountancy norms and rules about market competition. We find evidence that the efficiency of the legal environment affects significantly firm growth. We show that this result is unlikely to be driven by omitted variables. We also show that institutional framework impacts the influence of financial development on growth. We find that comprehensive shareholder and creditor protection affects more positively those sectors which are more externally financed; however disclosure requirements hinder the results of those industrial sectors that are more externally financed.