Legal origin, creditor protection and bank lending: Evidence from emerging markets

Cole, Rebel and Turk, Rima (2007): Legal origin, creditor protection and bank lending: Evidence from emerging markets.

Abstract

Numerous papers in the “law and finance” literature have established that countries with better functioning legal institutions enjoy better developed capital markets, and that legal origin is a fundamental determinant of legal institutions (La Porta et al. 1997, 1998, 2006; Djankov et al. 2007). In this study, we test whether banks are willing to grant more credit to the private sector when they enjoy superior legal protection. We test this hypothesis using bank-level data over the period 2000-2006 from 102 emerging-market countries and a random-effects model that controls for bank heterogeneity. We find that lenders allocate a significantly higher portion of their assets to loans (i) where they enjoy Socialist legal origin rather than English or French legal origin; (ii) where enforcement of debt contracts is more efficient and (iii) where banks enjoy fewer restrictions on their operations. These findings support our hypothesis that superior legal protection leads to more bank credit, which, in turn, should lead to higher economic growth. However, these findings contradict the predictions based upon the theory of legal origin.

• Item Type: MPRA Paper
• Institution: DePaul University
• Language: English
• Keywords: banking; creditor rights; emerging markets; investor protection; legal origin
• 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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