Hi On Shweser Book 3, Page 77 - Emerging Market Differences: Companies in developed countries tend to use MORE TOTAL DEBT and use longer maturity debt than firms in emerging markets. - Strength of legal system: Firms operating in countries with weak legal systems tend to have greater agency costs due to the lack of legal protection for investors. These firms (WEAK LEGAL) tend to use MORE LEVERAGE in their capital structure and have a greater reliance on short-term debt. By contrast, firms operating in countries with strong legal systems tend to use LESS DEBT OVERALL, and the debt used tends to have longer maturities. So which is it? Do firms in Emerging Markets (which presumably have weaker legal systems) use MORE DEBT (leverage) or LESS DEBT? Or are the firms in Emerging Markets using greater total leverage and less debt at the same time (implying much higher operating leverage)?
The way I understand it, you have to look at each piece of information individually. On the test, do not make the assumption that emerging markets have a weak legal system.