Working Papers

The research shows the importance of convergence of legal protection for financial stakeholders via strengthening the protection of their rights. Analysing the cross-country differences in investors’ legal rights protection levels, I find that legal convergence positively affects the corporate borrowings of listed companies. Moreover, such a pattern results in the alleviation of financial constraints. The research shows that legal convergence, caused by the solely increased creditor’s protection, harms corporate borrowings and leads to significant leverage contraction in general but with an even higher magnitude for financially constrained entities.

Additionally, the findings report that the legal convergence differently significantly affects borrowing activity for R&D-intensive companies, the ones with technology- and non-technology-based profiles, and financially distressed and non-distressed entities. The results show the positive correlation of legal convergence with short-term debt, convertible debt, retained earnings, cost of equity, and weighted cost of capital. The set of robustness tests confirms the main findings.