The Effectiveness of Minimum Capital and the Financial Plan: An Empirical Study of the Belgian Experience

Summary

SUMMARY

Capital and the capital structure of companies is a core theme in both corporate finance and corporate legal literature. In this study we address how the minimum capital and to a lesser extent the requirement for founders to present a financial plan in Belgian private limited liability companies is affecting their survival in the first six years of operations and how these requirements affect the companies’ solvency position. The number of private limited liability companies established with the minimum capital which went bankrupt or were liquidated is not significantly different from the number of companies which were established with a higher amount of capital. The number of limited liability companies that are still operational after six years is higher than the number of (limited) partnerships. However, this is due to the higher number of partnerships that were liquidated compared to the number of private (and public) limited liability companies. The establishment of a financial plan does not seem to have a major influence on the successfulness of the company. There is weak evidence that there are some differences in the size of the group of private limited liability companies established with a minimum capital that went bankrupt before the end of three year term and the group after three years of operation, affected by the requirements of the financial plan. Companies with a capital that exceeds the minimum capital are significantly more present in the group with a negative solvency ratio at the end of the second year of operation. For all other groups the financial position is not significantly different. The solvency of the private limited liability companies that during the first six years of operations went bankrupt deteriorates fast after being established. For the subgroup that was established with more than the minimum capital the solvency ratio is oft en negative within the first two years of operation. Companies that survive the first six years of operation have above average solvency ratios. It seems that the minimum capital threshold for private limited liability companies is, if anything and relatively speaking, set too high, which is contrary to the belief that the current low threshold is insufficient to adequately protect creditors.