When Do Creditor Rights Work?

Creditor-friendly laws are generally associated with more credit to the private sector and deeper financial markets. But laws mean little if they are not upheld in the courts. The authors hypothesize that the effectiveness of creditor rights is strongly linked to the efficiency of contract enforcement. This hypothesis is tested using firm level data on 27 European countries in 2002 and 2005. The analysis finds that firms have more access to bank credit in countries with better creditor rights, but the association between creditor rights and bank credit is much weaker in countries with inefficient courts. Exploiting the panel dimension of the data and the fact that creditor rights change over time, the authors show that the effect of a change in creditor rights on change in bank credit increases with court enforcement. In particular, a unit increase in the creditor rights index will increase the share of bank loans in firm investment by 27 percent in a country at the 10th percentile of the enforcement time distribution (Lithuania). However, the increase will be only 7 percent in a country at the 80th percentile of this distribution (Kyrgyzstan). Legal protections of creditors and efficient courts are strong complements.

Bibliographic Details

Main Authors:	Safavian, Mehnaz, Sharma, Siddharth
Format:	Policy Research Working Paper biblioteca
Language:	English
Published:	World Bank, Washington, DC 2007-08
Subjects:	ACCESS TO BANK, ACCESS TO CREDIT, ADVERSE SELECTION, ASYMMETRIC INFORMATION, AVAILABILITY OF CREDIT, BANK CREDIT, BANK FINANCING, BANK LENDING, BANK LOAN, BANK LOANS, BANKING SECTOR, BANKRUPTCY, BANKRUPTCY LAWS, BORROWER, BORROWING, CENTRAL ASIAN, CHECKS, COLLATERAL, COLLATERAL AGREEMENTS, COLLATERAL LAW, COLLATERAL LAWS, COMMERCIAL BANKS, CONTRACT DISPUTE, CONTRACT DISPUTES, CONTRACT ENFORCEMENT, COST OF CREDIT, COUNTRY FIXED EFFECTS, CREDIT INCREASES, CREDIT INFORMATION, CREDIT INFORMATION BUREAUS, CREDIT INFORMATION SYSTEM, CREDIT INFORMATION SYSTEMS, CREDIT INSTITUTIONS, CREDIT LAW, CREDIT LAWS, CREDIT MARKET, CREDIT MARKETS, CREDIT RATIONING, CREDITOR, CREDITOR RIGHT, CREDITOR RIGHTS, CREDITORS, DEBT, DEBT RECOVERY, DEBTOR, DELINQUENCY, DEMAND FOR CREDIT, DUMMY VARIABLE, EAST EUROPEAN, ECONOMIC DEVELOPMENT, ECONOMIC GROWTH, ECONOMIC THEORY, ECONOMICS, EMPLOYMENT, ENFORCEMENT MECHANISMS, ENFORCEMENT PROCEDURES, ENFORCEMENT SYSTEM, EXTERNAL FINANCE, FINANCE CORPORATION, FINANCIAL CONTRACTS, FINANCIAL DEVELOPMENT, FINANCIAL INSTITUTIONS, FINANCIAL INTERMEDIATION, FINANCIAL MARKET, FINANCIAL MARKETS, FINANCIAL OUTCOMES, FINANCIAL SECTOR, FINANCIAL STATEMENTS, FOREIGN OWNERSHIP, GOVERNMENT OWNERSHIP, GROSS DOMESTIC PRODUCT, IMPERFECT INFORMATION, INCOME, INCOMPLETE CONTRACTS, INFORMATIONAL ASYMMETRIES, INSTRUMENT, INTEREST RATE, INTEREST RATE SPREADS, INTERNATIONAL BANK, INTERNATIONAL CAPITAL, INTERNATIONAL CAPITAL MARKETS, INVESTMENT FINANCE, INVESTOR PROTECTION, JUDICIAL EFFICIENCY, JUDICIAL ENFORCEMENT, JUDICIAL REFORM, LEGAL ENFORCEMENT, LEGAL FRAMEWORK, LEGAL PROTECTIONS, LEGAL REFORM, LEGAL RIGHTS, LEGAL RIGHTS OF CREDITORS, LEGAL SYSTEM, LEGAL SYSTEMS, LENDERS, LOAN, LOAN CONTRACTS, LOAN REPAYMENT, LOCAL GOVERNMENTS, MARKET FAILURE, MARKET FAILURES, MARKET REFORMS, MIGRATION, MORAL HAZARD, MOVABLE PROPERTY, PERMANENT EMPLOYEES, PERMANENT WORKERS, POLITICAL ECONOMY, POSITIVE COEFFICIENTS, PRIVATE CREDIT, PRIVATE CREDIT BUREAU, PRIVATE REGISTRY, PROPERTY RIGHTS, REGRESSION ANALYSIS, REMITTANCES, REORGANIZATION, TANGIBLE ASSETS, TRADE CREDITORS, TRANSACTIONS LAWS, TRANSITION COUNTRIES, TRANSITION ECONOMIES, USE OF BANK CREDIT,
Online Access:	http://documents.worldbank.org/curated/en/2007/08/8011242/creditor-rights-work http://hdl.handle.net/10986/7488
Tags:	Add Tag No Tags, Be the first to tag this record!