IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Legal Institutions, Corporate Governance and Aggregate Activity: Theory and Evidence

This paper investigates the interaction between legal institutions and financial arrangements and the effects that these have on corporate decisions and aggregate activity, both theoretically and empirically. In the theoretical part, we develop a two country general equilibrium model with overlapping generations and asymmetric information in the credit market. We show that, at the steady state equilibrium, the country providing tighter legal enforcement has a larger aggregate output level and a bigger capital stock. Moreover, on the level of the individual firm, credit financing, capital stock and firm size are also higher where the judicial system is working better, while the leverage ratio is the same in the two countries. The driving force behind these results is that improvements in the legal protection of the creditor rights to repossess a collateral asset, increase the investment rate of return, by tempering the inefficiencies due to asymmetric information. In the empirical part, we provide evidence that confirms our theoretical predictions: firms located in Spanish or Italian judicial districts where courts are more efficient (the number of backlogs is lower, the number of concluded trials is larger or the average length of a trial is shorter) have access to a larger amount of external finance and have a larger size. We also document that Italian regions with more effective courts are endowed with a higher stock of private capital and enjoy a higher welfare level, if measured by the added value or the gross domestic product

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 72.

in new window

Date of creation: 01 Oct 2001
Handle: RePEc:sef:csefwp:72
Contact details of provider: Postal:
I-80126 Napoli

Phone: +39 081 - 675372
Fax: +39 081 - 675372
Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:sef:csefwp:72. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lia Ambrosio)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.