Judicial Risk and Credit Market Performance: Micro Evidence from Brazilian Payroll Loans
In: Financial Markets Volatility and Performance in Emerging Markets
AbstractA large body of literature has stressed the institution-development nexus as critical in explaining differences in countries%u2019 economic performance. The empirical evidence, however, has been mainly at the aggregate level, associating macro performance with measures of quality of institutions. This paper, by relating a judicial decision on the legality of payroll loans in Brazil to bank-level decision variables, provides micro evidence on how creditor legal protection affects market performance. Payroll loans are personal loans with principal and interests payments directly deducted from the borrowers%u2019 payroll check, which, in practice, makes a collateral out of future income. In June 2004, a high-level federal court upheld a regional court ruling that had declared payroll deduction illegal. Using personal loans without payroll deduction as a control group, we assess whether the ruling had an impact on market performance. Evidence indicates that it had an adverse impact on risk perception, interest rates, and amount lent.
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- Ana Carla A. Costa & Joao M.P. De Mello, 2006. "Judicial Risk and Credit Market Performance: Micro Evidence from Brazilian Payroll Loans," NBER Working Papers 12252, National Bureau of Economic Research, Inc.
- L19 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Other
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
- O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
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