Data show that better creditor protection is correlated across countries with lower average stock market volatility. Moreover, countries with better creditor protection are observed to have suffered lower decline in their stock market indexes during the current financial crisis. To explain this regularity, we use a stylised Tobin-q model of investment. Our model predicts that (1) the incidence of credit crunches should be lower in countries with better creditor protection; and, {2) that the decline in the stock market index during crises should be lower in countries with better creditor protection. We find support for these mechanisms in a panel data consisting of both OECD and OECD countries. We find that countries with higher level of creditor-rights protection are less likely to experience liquidity crises, even within the subsamples of OECD and non-OECD countries. We find, however, that only in the subsample of non-OECD countries do we observe a larger decline in the stock market index for countries with low level of creditor rights protection, in the presence of credit crunches.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Publisher Info
Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
7357.
Find related papers by JEL classification: F3 - International Economics - - International Finance G2 - Financial Economics - - Financial Institutions and Services
This paper has been announced in the following NEP Reports: