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 str...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2012
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2007/08/8011242/creditor-rights-work http://hdl.handle.net/10986/7488 |
| Summary: | 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. |
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