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Creditor Protection and Credit Volatility

  • Arturo Galindo

    ()

  • Alejandro Micco

This paper studies the relationship between creditor protection and credit volatility. During the negative phase of the business cycle, credit contracts more in countries with poor creditor protection. For similar shocks to business conditions, credit is more volatile in countries where creditors are de facto weakly protected. We test this idea using a dataset on legal determinants of finance in a panel of data of aggregate credit growth for a sample of 139 countries during the period 1990-2003. We find support for the view that better legal protections significantly reduce the impact of exogenous shocks on credit. The results are statistically and economically significant and robust to alternative measures of creditor protection, the inclusion of variables that reflect different stages of economic development and the restriction of our sample to only developing countries.

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File URL: http://www.iadb.org/research/pub_hits.cfm?pub_id=WP-528&pub_file_name=pubWP-528.pdf
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Paper provided by Inter-American Development Bank, Research Department in its series Research Department Publications with number 4401.

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Date of creation: Dec 2005
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Handle: RePEc:idb:wpaper:4401
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  1. Arturo Galindo & Alejandro Micco, 2005. "Bank Credit to Small and Medium-Sized Enterprises: The Role of Creditor Protection," Research Department Publications 4399, Inter-American Development Bank, Research Department.
  2. Stephen D. Oliner & Glenn D. Rudebusch, 1994. "Is there a broad credit channel for monetary policy?," Working Paper Series / Economic Activity Section 146, Board of Governors of the Federal Reserve System (U.S.).
  3. Beck, Thorsten & Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2003. "Financial and legal institutions and firm size," Policy Research Working Paper Series 2997, The World Bank.
  4. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. " Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-50, July.
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  7. Bernanke, Ben & Gertler, Mark & Gilchrist, Simon, 1994. "The Financial Accelerator and the Flight to Quality," Working Papers 94-24, C.V. Starr Center for Applied Economics, New York University.
  8. Thorsten Beck & Asli Demirguc-Kunt & Ross Levine, 2002. "Law, Endowment, and Finance," NBER Working Papers 9089, National Bureau of Economic Research, Inc.
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  11. Inessa Love, 2003. "Financial Development and Financing Constraints: International Evidence from the Structural Investment Model," Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 765-791, July.
  12. Johnson, Simon & Boone, Peter & Breach, Alasdair & Friedman, Eric, 2000. "Corporate governance in the Asian financial crisis," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 141-186.
  13. Oliver Hart & John Moore, 1991. "A Theory of Debt Based on the Inalienability of Human Capital," NBER Working Papers 3906, National Bureau of Economic Research, Inc.
  14. Bengt Holmstrom & Jean Tirole, 1994. "Financial Intermediation, Loanable Funds and the Real Sector," Working papers 95-1, Massachusetts Institute of Technology (MIT), Department of Economics.
  15. Asli Demirgüç-Kunt & Vojislav Maksimovic, 1998. "Law, Finance, and Firm Growth," Journal of Finance, American Finance Association, vol. 53(6), pages 2107-2137, December.
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