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Creditor Rights And Relationship Banking: Evidence From A Policy Experiment

Author

Listed:
  • Gursharan Bhue

    (University of Chicago)

  • Nagpurnanand Prabhala

    (Center for Advanced Financial Research and Learning (CAFRAL) and University of Maryland)

  • Prasanna Tantri

    (Indian School of Business)

Abstract

We examine how creditor rights shape the choice between arms length and relationship banking, exploiting natural variation due to changes in law. We show that arms length lending increases after a 2002 law that significantly expands creditor rights in India. The results are stronger when banks that enjoy greater informational advantage, for small firms, non-group firms and lenders empowered under the law. The results are confirmed by placebo tests and external validation tests using staggered implementation of an earlier, though weaker, law. Creditor rights determine not only the quantity but also the type of credit in an economy.

Suggested Citation

  • Gursharan Bhue & Nagpurnanand Prabhala & Prasanna Tantri, 2016. "Creditor Rights And Relationship Banking: Evidence From A Policy Experiment," Working Papers 022323, Centre for Advanced Financial Research and Learning (CAFRAL).
    • Handle: RePEc:ris:cafral:022323
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    File URL: https://www.cafral.org.in/sfControl/content/Speech/517201651551PMBhue_Prabhala_Tantri_2_Paper_2016-1705.pdf
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    Keywords

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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