Public enforcement and corporate maturity mismatch

• Published in: Managerial and decision economics Vol. 45; no. 6; pp. 3818 - 3833
• Main Authors: Ye, Yongwei, Yun, Feng, Zhang, Lei
• Format: Journal Article
• Language: English
• Published: Chichester Wiley Periodicals Inc 01.09.2024
• Subjects: Companies; Contracts; Discrimination; Economic development; Enforcement; Free trade; Loans; Maturity; Organizational performance; Ownership; Risk reduction
• ISSN: 0143-6570; 1099-1468
• DOI: 10.1002/mde.4239

The root of corporate maturity mismatch in developing economies may dwell in the fact that weak contract enforcement capacities suppress financial intermediates' willingness to supply long‐term credit. This study examines the impact of improvements in the legal enforcement environment on corporate maturity mismatch, focusing on the unique setting of China's free trade zones. Using data from non‐financial listed companies between 2010 and 2021, the study investigates how the establishment of FTZs, which signifies an improvement in contract enforcement efficiency, influences firms' financing decisions and maturity mismatch. We find that improvements in the contract enforcement environment significantly discipline the behavior of raising short‐term debt for long‐term investments. The effect is more pronounced for small‐to‐medium‐sized enterprises and non‐state‐owned enterprises, suggesting that such improvements alleviate ownership and size discrimination faced by firms. Mechanism test reveals that access to long‐term loans is the core mechanism. Besides, improvements in public enforcement reduce business risk and enhance firm performance. Strengthening the legal enforcement environment serves as a critical determinant to mitigate corporate maturity mismatch and foster sustained economic development.