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Judicial efficiency and bank credit to firms

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  • Giacomo Rodano

    (Bank of Italy)

Abstract

This paper analyses empirically the effect of judicial efficiency on bank credit contractual terms for the universe of Italian corporations borrowing from the banking sector. Exploiting within-country variation in the length of bankruptcy proceedings across different jurisdictions, the paper uses a spatial regression discontinuity design that compares credit conditions applied to firms located in municipalities on different sides of jurisdiction borders, controlling for bank characteristics. The results show that judicial efficiency is associated with a reduction in the cost of credit as well as with an increase in its availability for firms, in particular for those at high risk of default. Judicial efficiency increases leverage and investment for high risk firms. All these results suggest that the banking system tilts credit conditions in favor of safe firms as court inefficiency increases. Finally, court efficiency is also associated with a reduction in both the stock and the flow of Non Performing Loans.

Suggested Citation

  • Giacomo Rodano, 2021. "Judicial efficiency and bank credit to firms," Temi di discussione (Economic working papers) 1322, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1322_21
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    File URL: https://www.bancaditalia.it/pubblicazioni/temi-discussione/2021/2021-1322/en_tema_1322.pdf
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    References listed on IDEAS

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    Cited by:

    1. Lara Wemans & Manuel Coutinho Pereira, 2022. "Characteristics of parties and duration of insolvency cases in Portugal," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    2. Giorgio Albareto & Michele Cascarano & Stefania De Mitri & Cristina Demma & Roberto Felici & Carlotta Rossi, 2022. "The banking system and the financing of southern Italian firms," Questioni di Economia e Finanza (Occasional Papers) 684, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    judicial efficiency; creditor rights; loan contractual terms; spatial discontinuity approach;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • K15 - Law and Economics - - Basic Areas of Law - - - Civil Law; Common Law

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