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Bank Credit to Small and Medium-Sized Enterprises: The Role of Creditor Protection

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  • Arturo Galindo
  • Alejandro Micco

Abstract

We develop a model that shows that inefficient legal protections, disproportiantely increase financial restrictions for creditors that have less wealth. Due to fixed monitoring costs in equilibrium banks will not monitor small firms and therefore these firms will adopt risky technologies that imply a higher probability of bankruptcy. This implies that inefficiencies in the bankruptcy procedure will have a greater effect on small firms vis a vis large ones. Using a survey of firms in 62 countries around the world (WBES) and econometric techniques that allow us to deal with observed and unobserved country specific components as well as with partial endogeneity, we explore the role of creditor protection on small and medium-size enterprises’ access to bank credit. We find that better protection of creditors reduces the financing gap between small and large firms.

Suggested Citation

  • Arturo Galindo & Alejandro Micco, 2005. "Bank Credit to Small and Medium-Sized Enterprises: The Role of Creditor Protection," Working Papers Central Bank of Chile 347, Central Bank of Chile.
  • Handle: RePEc:chb:bcchwp:347
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. de la Torre, Augusto & Martínez Pería, María Soledad & Schmukler, Sergio L., 2010. "Bank involvement with SMEs: Beyond relationship lending," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2280-2293, September.
    2. Carmen Pagés-Serra & Reyes Aterido & Mary Hallward-Driemeier, 2007. "Investment Climate and Employment Growth: The Impact of Access to Finance, Corruption and Regulations Across Firms," Research Department Publications 4559, Inter-American Development Bank, Research Department.
    3. Arturo Galindo & Alejandro Micco, 2005. "Creditor Protection and Credit Volatility," Research Department Publications 4401, Inter-American Development Bank, Research Department.
    4. Carmen Pagés-Serra & Reyes Aterido & Mary Hallward-Driemeier, 2007. "Clima de negocios y creación de empleo: El efecto del acceso al crédito, la corrupción y el marco regulatorio en el crecimiento de las empresas," Research Department Publications 4560, Inter-American Development Bank, Research Department.
    5. Arturo Galindo & Alejandro Micco, 2005. "Protección a los acreedores e inestabilidad del crédito," Research Department Publications 4402, Inter-American Development Bank, Research Department.
    6. World Bank & International Finance Corporation, 2006. "Doing Business 2007 : How to Reform," World Bank Publications, The World Bank, number 7245.
    7. Pasali, Selahattin Selsah, 2013. "Where is the cheese ? synthesizing a giant literature on causes and consequences of financial sector development," Policy Research Working Paper Series 6655, The World Bank.
    8. Ayyagari,Meghana & Juarros,Pedro Francisco & Martinez Peria,Maria Soledad & Singh,Sandeep, 2016. "Access to finance and job growth : firm-level evidence across developing countries," Policy Research Working Paper Series 7604, The World Bank.

    More about this item

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior

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