The Capital Maintenance Principle Matters for Creditors

Relying on an unbalanced panel of firm-level data on Polish unlisted companies, we investigate the role of the capital maintenance principle in securing creditors’ interests. We document a persistently higher level of indebtedness among firms adhering to the capital maintenance principle. While the strength of the relationship is contingent on debt maturity, capital maintenance is found to be significant for both adjusting and non-adjusting creditors. Unlimited liability is evidenced to eliminate the need to maintain legal capital, thus demonstrating the notable role of legal capital in safeguarding creditors’ interests in cooperation with limited liability companies. In contrast with the viewpoint of the advocates of abandoning legal capital requirements, we show that legal capital remains an important mechanism for ensuring incentive compatibility between shareholders and creditors.