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Judicial Risk and Credit Market Performance: Micro Evidence from Brazilian Payroll Loans

In: Financial Markets Volatility and Performance in Emerging Markets

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  • Ana Carla A. Costa
  • João M. P. De Mello

Abstract

A 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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This chapter was published in:

  • Sebastian Edwards & Márcio G. P. Garcia, 2008. "Financial Markets Volatility and Performance in Emerging Markets," NBER Books, National Bureau of Economic Research, Inc, number edwa05-1.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 4777.

    Handle: RePEc:nbr:nberch:4777

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    1. Rafael LaPorta & Florencio Lopez-de-Silane & Cristian Pop-Eleches & Andrei Shleifer, 2003. "Judicial Checks and Balances," NBER Working Papers 9775, National Bureau of Economic Research, Inc.
    2. Rafael LaPorta & Florencio Lopez de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," Harvard Institute of Economic Research Working Papers 1788, Harvard - Institute of Economic Research.
    3. Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1996. "Law and Finance," NBER Working Papers 5661, National Bureau of Economic Research, Inc.
    4. Daron Acemoglu & Simon Johnson & James A. Robinson, 2001. "The Colonial Origins of Comparative Development: An Empirical Investigation," American Economic Review, American Economic Association, vol. 91(5), pages 1369-1401, December.
    5. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
    6. repec:fth:wobaco:1083 is not listed on IDEAS
    7. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
    8. Pradeep Dubey & John Geanakoplos & Martin Shubik, 2005. "Default and Punishment in General Equilibrium," Econometrica, Econometric Society, Econometric Society, vol. 73(1), pages 1-37, 01.
    9. Armando Castelar Pinneiro & Célia Cabral, 1999. "Credit Markets in Brazil: The Role of Judicial Enforcement and Other Institutions," Research Department Publications 3066, Inter-American Development Bank, Research Department.
    10. Altunbas, Yener & Evans, Lynne & Molyneux, Philip, 2001. "Bank Ownership and Efficiency," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 33(4), pages 926-54, November.
    11. Sapienza, Paola, 2004. "The effects of government ownership on bank lending," Journal of Financial Economics, Elsevier, vol. 72(2), pages 357-384, May.
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    Cited by:
    1. Muravyev, Alexander, 2009. "Investor protection and share prices: Evidence from statutory rules governing variations of shareholders’ class rights in Russia," MPRA Paper 13678, University Library of Munich, Germany.
    2. Barbosa, Klenio de Souza & Rocha, Bruno & Salazar, Fernando, 2013. "Assessing competition in the banking industry: A multi-product approach," Textos para discussão 339, Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
    3. Guilherme Lichand & Rodrigo R. Soares, 2011. "Access to justice and entrepreneurship: evidence from Brazil’s Special Civil Tribunals," Textos para discussão 591, Department of Economics PUC-Rio (Brazil).
    4. De Mello, João Manoel P. & Garcia, Márcio G.P., 2012. "Bye, bye financial repression, hello financial deepening: The anatomy of a financial boom," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(2), pages 135-153.
    5. Christiano A. Coelho & João M.P. De Mello & Bruno Funchal, 2012. "The Brazilian Payroll Lending Experiment," The Review of Economics and Statistics, MIT Press, vol. 94(4), pages 925-934, November.
    6. Sujata Visaria, 2009. "Legal Reform and Loan Repayment: The Microeconomic Impact of Debt Recovery Tribunals in India," American Economic Journal: Applied Economics, American Economic Association, vol. 1(3), pages 59-81, July.
    7. Thorsten Beck & Asli Demirgüç-Kunt, 2008. "Access to Finance: An Unfinished Agenda," World Bank Economic Review, World Bank Group, World Bank Group, vol. 22(3), pages 383-396, November.
    8. Juliano J. Assunção & Efraim Benmelech & Fernando S. S. Silva, 2012. "Repossession and the Democratization of Credit," NBER Working Papers 17858, National Bureau of Economic Research, Inc.
    9. João Manoel Pinho de Mello & Eduardo Zilberman, 2006. "Does crime affect economic decisions? An empirical investigation of savings in a high-crime environment," Textos para discussão 524, Department of Economics PUC-Rio (Brazil), revised Oct 2008.
    10. Gabriel de Abreu Madeira, 2012. "Legal Enforcement, Default and Heterogeneity of Project Financing Contracts," Working Papers, Department of Economics 2012_31, University of São Paulo (FEA-USP).
    11. Demirgüç-Kunt, A. & Beck, T.H.L. & Honohan, P., 2008. "Finance for all?: Policies and pitfalls in expanding access," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3508393, Tilburg University.

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