The paper investigates whether and how performance of regional commercial courts has affected external credit of Russian enterprises between 1995 and 2002. The results show that more reliable courts lead to higher bank lending to firms. This occurs predominantly through expansion of the number of businesses which have access to bank financing. There is limited evidence that trade credit also responds to changes in quality of courts. However, credit from suppliers is considerably less sensitive to court performance than bank credit. Court reliability is precisely defined and measured objectively using appeal rates of lower court decisions. The paper analytically derives the relationship between reliability of courts, appeal rates and lending to firms, identifying a specific channel through which law enforcement affects external financing. Empirical analysis is based on a new panel dataset which measures credit at the level of a firm and permits a number of robustness tests.
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Find related papers by JEL classification: O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process H40 - Public Economics - - Publicly Provided Goods - - - General
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