Legal origin, creditor protection and bank lending around the world

Cole, Rebel and Turk, Rima (2007): Legal origin, creditor protection and bank lending around the world.

Abstract

In this study, we test whether bankers make more loans when they enjoy superior creditor protection. We test these hypotheses using bank-level data from 35 developed countries and 113 developing countries over the period 2000-2006 and using a random-effects model that controls for bank heterogeneity. We find that bankers allocate a significantly larger portion of their assets to risky loans: (i) when they enjoy English common-law legal origin rather than French civil-law legal origin; (ii) when creditors’ rights are weaker; (iii) when their banks are larger; and (iv) when the largest shareholder has a lower percentage ownership. We also find that bankers in developing countries, but not in developed countries, allocate a significantly larger portion of their assets to risky loans when legal enforcement of creditor rights is more efficient. Overall, these results provide strong support for the theory of legal origin but provide only mixed support for the “power” theories of credit.

• Item Type: MPRA Paper
• Institution: DePaul University
• Language: English
• Keywords: banking, bank loans, bank risk-taking, creditor protection, creditors’ rights, emerging markets, investor protection, judicial enforcement, law and finance, legal origin, legal rights
• Subjects: O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance; G - Financial Economics > G3 - Corporate Finance and Governance > G34 - Mergers ; Acquisitions ; Restructuring ; Corporate Governance; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

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