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The Influence of Creditor Rights and Contract Enforcement on the Levels of Factor Financing

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  • Joshua Mwakujonga

Abstract

Theories of credit and law and finance posit that, lenders are inclined to provide more credit when laws protect them. However, previous studies have related these ideas and the concepts of creditor rights and contract enforcement with bank lending. Factor financing or factoring as one of the financing technologies is also likely to be affected by the levels of creditor rights and contract enforcement in the economy. In this regard, the primary objective of this study was to measure how legal variables (creditor rights and contract enforcement) influence the levels of factoring at country-level. By using a reduced-form econometric model, this study used a panel of 35 countries from 2003 to 2013. By using ordinary least square (OLS), this study regressed factoring against the explanatory variables of interest. These includes creditor rights, contract enforcement and macroeconomic variables (controls). The control variables are suggested to determine the levels of factoring independently. The results of the study revealed that creditor rights and contract enforcement are positively and strongly significant in influencing the levels of factoring. Countries with better creditor rights and improved contract enforcement have exhibited relatively more factoring volume. It implies that, factoring demands the same legal environments like other conventional lending technologies. Also, the results indicate that, some macroeconomic variables are significant in determining the levels of factoring.

Suggested Citation

  • Joshua Mwakujonga, 2015. "The Influence of Creditor Rights and Contract Enforcement on the Levels of Factor Financing," International Journal of Financial Economics, Research Academy of Social Sciences, vol. 4(2), pages 85-91.
    • Handle: RePEc:rss:jnljfe:v4i2p1
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    References listed on IDEAS

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