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

Rebel A. Cole () and Rima Turk

MPRA Paper from University Library of Munich, Germany

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.

Keywords: banking; creditor rights; emerging markets; investor protection; legal origin (search for similar items in EconPapers)
JEL-codes: O16 G34 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-reg
Date: 2007-05-30, Revised 2008-03-18
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http://mpra.ub.uni-muenchen.de/4713/ orginal version
http://mpra.ub.uni-muenchen.de/8085/ revised version

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