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THE IMPORTANCE OF LEGAL FORM OF ORGANIZATION ON SMALL CORPORATION EXTERNAL FINANCING
Author(s) -
Chen Daphne,
Qi Shi
Publication year - 2016
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/ecin.12330
Subject(s) - external financing , equity capital , corporation , loan , equity (law) , economics , finance , capital structure , macro , business , debt , capital market , political science , computer science , law , programming language
This article quantitatively evaluates the impact of legal form of organization ( LFO ) choices, C versus S corporation, on small business external financing. A treatment effect model is formulated and estimated to examine the relationship between corporate types and chances of obtaining external financing. The estimation takes into account self‐selection bias associated with LFO choices. This article finds that LFO choices mainly affect small corporations' access to external equity capital, but have no significant impact on loan financing. Specifically, when a small corporation selects the C corporate legal form, the probability of obtaining new external equity is eight times higher compared to when it selects the S corporate legal form. Furthermore, the results suggest that better access to external equity investments, loosening business capital constraints, leads to better growth prospects for small C corporations. These empirical results have important macro‐economic implications on corporate financial and fiscal policies. ( JEL G32, G38)