NBER paper finds shareholder protection dampens crises
Shareholder protection helps firms substitute debt for equity
When bank loans dry up, firms can turn to equity for a back-up source of funding, dampening banking crises, and the effect is stronger if shareholders are protected, research published by the National Bureau of Economic Research (NBER) has found.
Ross Levine, Chen Lin and Wensi Xie, authors of the working paper Spare Tire? Stock Markets, Banking Crises, and Economic Recoveries, argue it is the legal framework protecting shareholders that is the crucial factor in determining the ability of equity
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