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

Rebel Cole and Rima Turk Ariss

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 from 45 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 English legal origin rather than French or Socialist legal origin; (ii) where enforcement of debt contracts is more efficient and (iii) where banks enjoy fewer restrictions on their operations. These support our hypothesis that superior legal protection leads to more bank credit, which, in turn, should lead to higher economic growth.

Keywords: banking; creditor rights; emerging markets; investor protection; legal origin (search for similar items in EconPapers)
JEL-codes: G21 G34 O16 (search for similar items in EconPapers)
Date: 2007-05-30
New Economics Papers: this item is included in nep-ban and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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