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Judicial Discretion, Credit, and the Real Economy

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Listed:
  • Pedro Amoni
  • Leonardo Soriano Alencar

Abstract

We investigate how court rulings affect banks’ views on the protection of creditor rights, their lending practices, and the ultimate effects on business performance. Leveraging the random assignment of judges to cases brought against financial institutions, we demonstrate banks restrict credit after observing unfavorable decisions issued by pro-debtor judges in disputes involving them. This informational shock is transmitted to firms within banks’ relationships through credit rationing for small businesses, adversely affecting their performance. Our research highlights the significant role of judges in shaping economic activity beyond the immediate parties involved in a legal conflict.

Suggested Citation

  • Pedro Amoni & Leonardo Soriano Alencar, 2025. "Judicial Discretion, Credit, and the Real Economy," Working Papers Series 618, Central Bank of Brazil, Research Department.
    • Handle: RePEc:bcb:wpaper:618
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    File URL: https://www.bcb.gov.br/content/publicacoes/WorkingPaperSeries/WP618v3.pdf
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    References listed on IDEAS

    as
    1. Jappelli, Tullio & Pagano, Marco & Bianco, Magda, 2005. "Courts and Banks: Effects of Judicial Enforcement on Credit Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(2), pages 223-244, April.
    2. Carola Schenone, 2010. "Lending Relationships and Information Rents: Do Banks Exploit Their Information Advantages?," The Review of Financial Studies, Society for Financial Studies, vol. 23(3), pages 1149-1199, March.
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