Legal form and risk exposure in Spanish firms

Campos, Javier and Carrasco, Raquel and Requejo, Alejandro (2003): Legal form and risk exposure in Spanish firms. Published in: Spanish Economic Review , Vol. 2, No. 5 (2003): pp. 101-121.

Abstract

Since the legal form adopted by a firm determines the type of legal responsibility borne by its owners in case of bankruptcy, in this paper we argue that a firm under a limited liability status should be characterized by a higher than average risk exposure, defined in terms of a lower capital-labor ratio for a given capital structure, which ultimately determines the bankruptcy probability when output is affected by exogenous shocks. To test these predictions we extend Lee’s (1976) switching regressions model to a panel dataset of 1,313 Spanish firms from 1990-1994, separating them into corporate and entrepreneurial forms (with/without limited liability, respectively). We consider both random effects and fixed effects panel data models, taking into account the endogeneity between risk exposure and the legal form choice. Our results confirm the hypothesis that firms under limited liability have significant higher risk exposure than firms under unlimited liability.

• Item Type: MPRA Paper
• Language: English
• Keywords: limited liability, risk exposure, sample selection, switching regressions, panel data.
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C20 - General; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L21 - Business Objectives of the Firm

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