In coporate finance chapter, it says stronger legel system, the lower use of total Debt
It’s really counterintuitive… Can someone explain it? Many thanks.
Debt is a claim on the firms assets, the residual of the two is an equity claim. If there is not a strong legal system, there’s a chance your assets could be easily lost through government seizures, theft by third party (unable to dispute ownership of assets, no court process) etc.
Therefore, you want to transfer as much of this risk to others, in this case, debt holders. You’re essentially selling this risk for cash, which is harder to steal, to a bondholder.
Got it. Thanks Galli.