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Legal origin, creditor protection and bank lending: Evidence from emerging markets

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  • Cole, Rebel
  • Turk, Rima

Abstract

Numerous papers in the “law and finance” literature have established that countries with better functioning legal institutions enjoy better developed capital markets, and that legal origin is a fundamental determinant of legal institutions (La Porta et al. 1997, 1998, 2006; Djankov et al. 2007). In this study, we test whether banks are willing to grant more credit to the private sector when they enjoy superior legal protection. We test this hypothesis using bank-level data from 45 emerging-market countries and a random-effects model that controls for bank heterogeneity. We find that lenders allocate a significantly higher portion of their assets to loans (i) where they enjoy English legal origin rather than French or Socialist legal origin; (ii) where enforcement of debt contracts is more efficient and (iii) where banks enjoy fewer restrictions on their operations. These support our hypothesis that superior legal protection leads to more bank credit, which, in turn, should lead to higher economic growth.

Suggested Citation

  • Cole, Rebel & Turk, Rima, 2007. "Legal origin, creditor protection and bank lending: Evidence from emerging markets," MPRA Paper 4713, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:4713
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    References listed on IDEAS

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    Cited by:

    1. Aggarwal, Raj & Goodell, John W., 2009. "Markets versus institutions in developing countries: National attributes as determinants," Emerging Markets Review, Elsevier, vol. 10(1), pages 51-66, March.

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    More about this item

    Keywords

    banking; creditor rights; emerging markets; investor protection; legal origin;
    All these keywords.

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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