How Law Affects Lending

Rainer Haselmann (), Katharina Pistor and Vikrant Vig

The Review of Financial Studies, 2010, vol. 23, issue 2, 549-580

Abstract: The paper investigates the effect of legal change on the lending behavior of banks in twelve transition economies. First, we find that banks increase the supply of credit subsequent to legal change. Second, changes in collateral law matter more for increases in bank lending than do changes in bankruptcy law. We attribute this finding to the different functions of collateral and bankruptcy law. While the former enhances the likelihood that individual creditors can realize their claims against a debtor, the latter ensures an orderly process for resolving multiple, and often conflicting, claims after a debtor has become insolvent. Finally, we find that foreign-owned banks respond more strongly to legal change than incumbents. The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

Date: 2010
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