Results of a multivariate analysis on the choice of law 161

Before the article sets out to investigate the role of path dependence in regulatory arbitrage, the factors influencing firms’ choice of law will be analysed in a multivariate context. Table 6.7 and Table 6.8 present the results of the simple probit model as laid out in equation 6.1. The model respectively estimates the probability that the corporate entity issuing the debt security is located abroad or the debt security specifies a foreign contract law. In what follows, all estimates are reported as marginal effects as they can conveniently be interpreted in this way. Moreover, since the overall sample consists of a broad array of debt securities, a subsample of straight bonds was constructed to check for the robustness of the findings. In a second step, the analysis specifies dummy variables for the legal advisor accompanying the debt issue.

Regarding the location of the debt issuer, only one deal specific variable turns out to be highly significant. As in the descriptive analysis, the currency of a debt issue is strongly related to the location of the debt issuer. The size and maturity of the debt

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security fail to be statistically significant, which is also true for the risk, coupon payment and marketplace in which the debt contract is traded. However, the probit model supports the more pronounced wanderlust among Italian and French issuers as compared to German issuers. The empirical evidence also reveals that firms prefer to locate debt issuers in larger economies, which could be due to legal or economic network effects.

Regarding the legal factors driving the choice of the issuer location in multinational firms, Eidenmüller et al. (2010b) have found low withholding taxes to attract more cross border debt issues. This result is somewhat puzzling for Germany, as the country traditionally had no withholding taxes on debt securities, but local firms have issued a large number of debt securities by corporate entities abroad. It is hence not surprising that withholding taxes were not found to be a significant predictor for regulatory arbitrage in the subsample at hand. While low withholding taxes may generally attract debt issues, firms in some jurisdictions may simply use different channels to engage in regulatory arbitrage. Two important channels might be corporate taxes and creditor rights.

While Eidenmüller et al. (2010b) could not disentangle whether regulatory arbitrage with respect to corporate taxation confirms the profit shifting or the tax shield hypothesis, the evidence at the micro level clearly supports the assumption that firms engage in profit shifting (see Table 6.7). The empirical findings show that the larger the (positive) gap in the statutory corporate tax rates between the location of the corporate parent and the issuing entity, the higher the probability that the debt issue is placed abroad.114 Debt issuers can benefit from such tax differentials by overcharging other affiliates for an intra-group loan, thereby effectively siphoning off profits from a high tax jurisdiction (Eidenmüller et al. 2010b). Furthermore, by exploiting the information on the debt security level, the probit estimates reveal that firms preferably choose venues with stronger creditor rights. This result can be traced        

114 _{The tax gap was calculated by subtracting the tax rate of the subsidiary from the tax rate the}

corporate parent is subject to. A positive effect hence indicates that a higher tax rate at the corporate parent’s location and low tax rates at the subsidiary’s location attract more debt issues in the latter.

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back to the fact that stronger creditor rights mitigate the principal agent problem between debt holders and managers, thereby reducing agency costs, which in turn increases the expected return of the investor. Finally, it is worth mentioning that all of these findings are robust for the subsample of straight bonds and the specification of legal advisor dummies.

With regard to regulatory arbitrage in contract law, section 6.4.1. already revealed that the choice of a foreign law is almost identical to the choice of UK law. For this reason, a subsample of debt contracts specifying UK contract law was constructed as a robustness check. The multivariate probit regression confirms that French and Italian issues specify foreign contract laws more frequently. Unlike regulatory arbitrage with regard to the issuer location, deal specific characteristics play an important role for the choice of contract law. Larger deals are less likely to be governed by foreign or UK law, while debt contracts with a longer maturity more often specify UK law (though not foreign law in general).

Moreover, the risk of the debt security and the interest payment turn out to be highly significant predictors of the applicable contract law. Riskier debt securities are less likely to specify foreign or UK contract law, while firms apparently compensate investors for the adoption of foreign contract law with higher coupon payments. Finally, debt issues in foreign currencies are positively correlated with the adoption of foreign law, but not UK law in particular. As regards the unreported legal advisor dummies, the only statistically significant dummy is the in-house legal counsel, which indicates that in-house legal departments have a more pronounced home bias regarding the applicable contract law.115

115 _{This finding is consistent with the answers of expert interviews, which had been carried out}

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Table 6.7 Multivariate probit model estimates for foreign corporate debt issuers all debt issues straight bond issues

Transaction Variables Amount in Prospect * 10³ 0.055 0.073 0.115 0.139 (0.579) (0.469) (0.280) (0.189) Maturity (Years) -0.002 -0.001 -0.002 -0.001 (0.508) (0.723) (0.595) (0.731) S&P Rating 0.005 0.006 0.016 0.017 (0.585) (0.519) (0.251) (0.216) Coupon -0.022 * -0.021 * -0.023 -0.021 (0.075) (0.094) (0.162) (0.181) Marketplace 0.001 0.001 -0.001 -0.001 (0.437) (0.498) (0.715) (0.744) Currency -0.010 *** -0.013 *** -0.007 *** -0.008 *** (0.000) (0.000) (0.000) (0.000) France 0.147 *** 0.155 *** 0.149 *** 0.155 *** (0.000) (0.000) (0.001) (0.001) Italy 0.259 *** 0.276 *** 0.300 *** 0.313 *** (0.007) (0.005) (0.008) (0.006) Macro Economy GDP 0.002 ** 0.002 ** 0.002 *** 0.002 *** (0.012) (0.011) (0.000) (0.000) Int. Bond Market * 10³ -0.281 -0.228 -0.565 -0.516 (0.498) (0.579) (0.225) (0.243)

Risk

Inflation 0.396 0.399 0.282 0.248 (0.251) (0.249) (0.190) (0.206) Government Bond Yield 2.316 2.849 0.184 0.049 (0.547) (0.472) (0.596) (0.881) Withholding Tax -0.034 -0.038 -0.020 * -0.017 (0.292) (0.265) (0.069) (0.144) Corporate Tax 0.012 *** 0.012 *** 0.012 ** 0.012 ** (0.001) (0.001) (0.023) (0.030) Creditor Rights -0.577 *** -0.616 *** -0.449 *** -0.434 *** (0.008) (0.007) (0.000) (0.000)

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Legal Advisor Dummies - Y - Y

Observations 1489 1470 970 946

Log Pseudolikelihood -183 -179 -108 -106

Pseudo R² 78.4 78.5 81.3 81.1

SEs robust robust robust robust

marginal effects, p-values in parentheses

Table 6.8 Multivariate probit model estimates for the contract law specified in the debt contract

Foreign UK Foreign UK Amount in Prospect * 10³ -0.191 *** -0.146 ** -0.205 *** -0.116 * (0.001) (0.016) (0.001) (0.064) Maturity (Years) 0.001 0.005 ** 0.001 0.006 *** (0.731) (0.018) (0.534) (0.011) S&P Rating -0.018 *** -0.012 *** -0.017 *** -0.011 ** (0.000) (0.006) ( 0.000) (0.010) Coupon 0.019 *** 0.018 *** 0.018 *** 0.015 *** (0.000) (0.000) (0.001) (0.002) Marketplace 0.001 0.001 0.001 0.001 (0.322) (0.390) (0.292) (0.447) Currency 0.004 *** -0.002 *** 0.004 *** -0.002 ** (0.000) (0.000) ( 0.000) (0.012) France 0.210 *** 0.144 *** 0.222 *** 0.151 *** (0.000) (0.000) ( 0.000) (0.000) Italy 0.296 *** 0.268 *** 0.295 *** 0.297 *** (0.000) (0.000) ( 0.000) (0.000)

Legal Advisor Dummies - - Y Y

Observations 1560 1721 1524 1681 Log Pseudolikelihood -912 -1127 -887 -1085

Pseudo R² 9.7 4.9 10.1 6.2

SEs robust robust robust robust

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