Legal rights matter: evidence from panel data on creditor protection and debt

Using panel data derived from recent financial statements, we examine the relationship between changing creditor protection and leverage (and debt maturity) in a number of emerging market countries located in Central and Eastern Europe. We examine unlisted firms, which are more likely than listed companies to face credit constraints. Our main hypothesis is whether unlisted firms change their leverage and debt maturity as creditor rights increase. We confirm this to be the case at both the country- and firm-level; our findings are robust to alternative econometric specifications and inclusion of country- and firm-level controls. We also find that legal origin is related to the level of debt and its maturity.