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Does a country's Institutional and legal system play a major role in corporate financing
decisions? If so how?
Solution
It plays a very important role. Taxation, institutional and legal systems all play a crucial role.
Tax treatment of interest, dividend, capital gains determine the capital structure and retention of
funds for investment. Also, what are the laws regarding default of payments determine the
proportion of debt. Is the institutional system so robust and developed as to allow easy raising of
funds determine the equity. The legal handling of liability to be incurred in case of any
wrongdoings or default determine the readiness of investors to invest money.

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