Law and Firms' Access to Finance

Why does a country's legal origin influence its firms' access to finance? Using data from over 4,000 firms in 38 countries, the authors show that firms in countries with French legal origin face significantly higher obstacles in accessing external finance than firms in common law countries. Next, their results indicate that French legal origin countries tend to have (1) less adaptable legal systems, as defined by the degree to which case law and principles of equity rather than simply statutory law are accepted foundations of legal decisions, and (2) less politically independent judiciaries, as defined by the degree of tenure of supreme court judges and their jurisdiction over cases involving the government. Finally, the authors find that the adaptability of a country's legal system is more important for explaining the obstacles that firms face in contracting for external finance than the political independence of the judiciary. So, they distinguish among competing explanations of why law matters for financial development by empirically documenting the links running from international differences in legal origin to the operation of the financial system at the firm level.

Bibliographic Details

Main Authors:	Levine, Ross, Beck, Thorsten, Demirgüç-Kunt, Asli
Language:	English en_US
Published:	World Bank, Washington, DC 2004-01
Subjects:	AGGREGATE INDICATOR, APPLICABLE LAW, BANKING SECTOR, BUREAUCRACY, BUSINESS ENVIRONMENT, CASE LAW, CIVIL CODES, CIVIL LAW, CODES, COLONIES, COMMON LAW, COMPARATIVE LAW, COUNTRY CHARACTERISTICS, COURT DECISIONS, COURT SYSTEM, COURTS, DISPUTE RESOLUTION, ECONOMIC DEVELOPMENT, ECONOMIC GROWTH, FINANCIAL DEVELOPMENT, FINANCIAL SYSTEM, FINANCIAL SYSTEMS, FINANCING CONSTRAINTS, FOREIGN ENTITY, FOREIGN INVESTORS, GROWTH RATE, INCOME, INDEPENDENT JUDICIARY, INSTITUTIONAL DEVELOPMENT, JUDGES, JUDICIAL DECISIONS, JUDICIAL INDEPENDENCE, JUDICIAL POWER, JUDICIAL SYSTEM, JUDICIARY, JURISPRUDENCE, LAW FIRMS, LAW INDICATOR, LAWS, LEGAL CODES, LEGAL DOCTRINE, LEGAL FORMALISM, LEGAL FORMS, LEGAL INSTITUTIONS, LEGAL ORIGIN, LEGAL ORIGINS, LEGAL RIGHTS, LEGAL STRUCTURE, LEGAL SYSTEM, LEGAL SYSTEMS, LEGAL TRAINING, LEGISLATURE, LIQUIDATION, LITIGATION, MANUFACTURING SECTOR, MEASUREMENT ERROR, MOTIVATIONS, PRIVATE PROPERTY, PROPERTY RIGHTS, REPRESENTATIVES, REVERSE CAUSATION, REVOLUTION, RULE OF LAW, RULINGS, STATE POWER, STATUTORY RIGHTS, SUPREME COURTS, AGGREGATE INDEXES, POLITICAL INDEPENDENCE,
Online Access:	http://documents.worldbank.org/curated/en/2004/01/3172100/law-firms-access-finance https://hdl.handle.net/10986/15630
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