How Law Affects Lending

Haselmann, Rainer and Pistor, Katharina and Vig, Vikrant (2006): How Law Affects Lending.

Abstract

A voluminous literature seeks to explore the relation between law and finance, but offers little insights into dynamic relation between legal change and behavioral outcomes or about the distributive effects of law on different market participants. The current paper disentangles the law-finance relation by using disaggregate data on banks’ lending patterns in 12 transition countries over a 8 year period. This allows us to control for country level heterogeneity and differentiate between different types of lenders. Employing a differences-in-differences methodology in an exclusive ”laboratory” setting as well as unique hand collected datasets on legal change as well as changes in bank ownership, we find that lending volume responds positively to legal change. However, not all legal change is equally effective. The introduction of a legal regime that enhances each lender’s individual prospects of enforcing her claims (collateral law) results in greater increases in lending volume than changes in bankruptcy law, the essence of which is to provide an orderly liquidation or reorganization process in the presence of multiple creditors. Finally, we find that banks that newly enter the market respond more strongly to legal change than do incumbents. In particular, foreign-owned banks extend their lending volume substantially more than domestic banks.

• Item Type: MPRA Paper
• Language: English
• Keywords: creditor rights; credit market development; bankruptcy; collateral law; bank lending
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; F - International Economics > F3 - International Finance > F37 - International Finance Forecasting and Simulation: Models and Applications; F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems; G - Financial Economics > G3 - Corporate Finance and Governance > G33 - Bankruptcy ; Liquidation

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