The Impact of Creditor Protection on Stock Prices in the Presence of Credit Crunches

Galina Hale (), Assaf Razin () and Hui Tong ()

No 7357, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Data show that better creditor protection is correlated across countries with lower average stock market volatility. Moreover, countries with better creditor protection are observed to have suffered lower decline in their stock market indexes during the current financial crisis. To explain this regularity, we use a stylised Tobin-q model of investment. Our model predicts that (1) the incidence of credit crunches should be lower in countries with better creditor protection; and, {2) that the decline in the stock market index during crises should be lower in countries with better creditor protection. We find support for these mechanisms in a panel data consisting of both OECD and OECD countries. We find that countries with higher level of creditor-rights protection are less likely to experience liquidity crises, even within the subsamples of OECD and non-OECD countries. We find, however, that only in the subsample of non-OECD countries do we observe a larger decline in the stock market index for countries with low level of creditor rights protection, in the presence of credit crunches.

Keywords: credit crunch; Tobin Q (search for similar items in EconPapers)
JEL-codes: F3 G2 (search for similar items in EconPapers)
Date: 2009-07

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Working Paper: The Impact of Credit Protection on Stock Prices in the Presence of Credit Crunches (2009)
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