amounts of intangible assets. To investigate robustness, different variations are used for the dependent variable, including the ratio of fixed assets to total assets, the ratio of intangible asset to total assets and the ratio of intangible assets to fixed assets Furthermore, two flow variables, the ratio of capital expenditures to sales and the ratio of research and development expenditure to sales, are used as indicators of firms nvestment structures Intangible assets/Fix ed assets k=Constant +B,n Industry indicators + Bn. Property rights of country k+E, k The next and last set of tests relate the relative amounts of long-term and short-term debt for industry j in country k to the quality of law and order in the country. If the hypothesis that firms in countries with a weaker legal framework have less long-term and more short-term debt is correct, then equation 3)should produce a positive coefficient (after correcting for industry-specific effects) for the law and order index. Again, different variations of the dependent variable are used, including the ratio of long-term and short-term debt to total assets, the ratio of total debt to assets and the ratio of long- term debt to fixed assets. Furthermore, both the index of the quality of property rights as well as the share of fixed assets out of total assets are used as independent variables to investigate the importance of collateralizable assets for firm financing patterns (Long-term or Short-term debt)/Asse ts,k=Constant +B.n. Industry indicators +Bn l. Law and order of country k+Eik 4. Data We use firm-level data from WorldScope, the dataset from RZ, and some count specific data from a variety of sources. Table 1 presents an overview of the country We should note that we tend to use the term law and order when referring to the impact of the legal framework on the supply of external financing and the term property rights when referring to the impact of the legal framework on the asset composition choices
11 amounts of intangible assets. To investigate robustness, different variations are used for the dependent variable, including the ratio of fixed assets to total assets, the ratio of intangible asset to total assets and the ratio of intangible assets to fixed assets. Furthermore, two flow variables, the ratio of capital expenditures to sales and the ratio of research and development expenditure to sales, are used as indicators of firms’ investment structures. n j k j k n k 1 , , 1... Property rights of country Intangible assets/Fix ed assets Constant Industry indicators b e b + × + = + × + (2) The next and last set of tests relate the relative amounts of long-term and short-term debt for industry j in country k to the quality of law and order in the country. If the hypothesis that firms in countries with a weaker legal framework have less long-term and more short-term debt is correct, then equation (3) should produce a positive coefficient (after correcting for industry-specific effects) for the law and order index. Again, different variations of the dependent variable are used, including the ratio of long-term and short-term debt to total assets, the ratio of total debt to assets and the ratio of longterm debt to fixed assets. Furthermore, both the index of the quality of property rights as well as the share of fixed assets out of total assets are used as independent variables to investigate the importance of collateralizable assets for firm financing patterns. n j k j k n k 1 , , 1... Law and order of country (Long -term or Short -term debt)/Assets Constant Industry indicators b e b + × + = + × + + (3) 4. Data We use firm-level data from WorldScope, the dataset from RZ, and some countryspecific data from a variety of sources. Table 1 presents an overview of the country- 4 We should note that we tend to use the term law and order when referring to the impact of the legal framework on the supply of external financing and the term property rights when referring to the impact of the legal framework on the asset composition choices
specific and firm-specific variables used in the empirical analysis and their sources. Most of the variables are self-explanatory and have been used in other cross-country studies of firm financing structures and firm growth Table 2 presents the summary statistics of the country-specific and some firm variables grouped by developing and developed countries(Annex 1 presents the same summary statistics, but by individual country ). The country summary statistics in panel a show that developing countries as a group have weaker law and order systems, worse otection of property rights, less developed financial systems, and fewer patents per capita. All variables excepts for the private-credit-to-GDP ratio are statistically significant different between the two groups of countries. This result on the differences in the degree of law and order between developed and developing countries has been documented extensively in other work. This difference in legal framework partly relates to the differences in the credit-to-gdp between these two groups of countries, where low contract enforcement environments have hindered the development of financial systems in developing countries. The result for the relative levels of patents granted suggests that developing countries generate lower levels of research and development. The level of patents relates in part to the quality of property rights, which has a negative correlation with the number of patents of 0.557, suggesting that lower property rights deter the adoption of patents. Of course, other factors, such as the level of education, capital investment and general development, will also affect the outcome of the number of patents in a country In general, good(poor law and order and good(poor) property rights tend to go together. This would imply that only points d(high law and order and strong property rights)or B (low law and order and strong property rights) in Figure 1 are relevant. As such, analyzing the differential effects of the quality of law and order and property rights on the level of external financing available and the allocation of investment would be difficult. However, the correlation between the two concepts is not perfect and it possible to be at either points C or E, i.e., there exist countries with good property rights and poor law and order systems, and vice versa. South Korea, for example, has a high score on protection of property rights(property rights index equals 1), but relatively poor law and order(the law and order index is only 5.35, which is well below the sample median of 7.8). France, on the other hand, has a good legal system(reflected by a law
12 specific and firm-specific variables used in the empirical analysis and their sources. Most of the variables are self-explanatory and have been used in other cross-country studies of firm financing structures and firm growth. Table 2 presents the summary statistics of the country-specific and some firm variables grouped by developing and developed countries (Annex 1 presents the same summary statistics, but by individual country). The country summary statistics in panel A show that developing countries as a group have weaker law and order systems, worse protection of property rights, less developed financial systems, and fewer patents per capita. All variables excepts for the private-credit-to-GDP ratio are statistically significant different between the two groups of countries. This result on the differences in the degree of law and order between developed and developing countries has been documented extensively in other work. This difference in legal framework partly relates to the differences in the credit-to-GDP between these two groups of countries, where low contract enforcement environments have hindered the development of financial systems in developing countries. The result for the relative levels of patents granted suggests that developing countries generate lower levels of research and development. The level of patents relates in part to the quality of property rights, which has a negative correlation with the number of patents of 0.557, suggesting that lower property rights deter the adoption of patents. Of course, other factors, such as the level of education, capital investment and general development, will also affect the outcome of the number of patents in a country. In general, good (poor) law and order and good (poor) property rights tend to go together. This would imply that only points D (high law and order and strong property rights) or B (low law and order and strong property rights) in Figure 1 are relevant. As such, analyzing the differential effects of the quality of law and order and property rights on the level of external financing available and the allocation of investment would be difficult. However, the correlation between the two concepts is not perfect and it is possible to be at either points C or E, i.e., there exist countries with good property rights and poor law and order systems, and vice versa. South Korea, for example, has a high score on protection of property rights (property rights index equals 1), but relatively poor law and order (the law and order index is only 5.35, which is well below the sample median of 7.8). France, on the other hand, has a good legal system (reflected by a law