RFS Advance Access published online on September 29, 2009
Review of Financial Studies, doi:10.1093/rfs/hhp073
How Law Affects Lending
Johannes Gutenberg University Mainz
Columbia Law School
London Business School
Send correspondence to Vikrant Vig, London Business School, Regent’s Park, London NW1 4SA, UK; telephone: +44 20 7000 8274; fax: +44 20 7000 7001. E-mail: vvig{at}london.edu.
JEL Classification: F34, F37, G21, G28, G33, K39
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Abstract |
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The paper investigates the effect of legal change on the lending behavior of banks in twelve transition economies. First, we find that banks increase the supply of credit subsequent to legal change. Second, changes in collateral law matter more for increases in bank lending than do changes in bankruptcy law. We attribute this finding to the different functions of collateral and bankruptcy law. While the former enhances the likelihood that individual creditors can realize their claims against a debtor, the latter ensures an orderly process for resolving multiple, and often conflicting, claims after a debtor has become insolvent. Finally, we find that foreign-owned banks respond more strongly to legal change than incumbents.
We would like to thank Viral Acharya, Heitor Almeida, Ken Ayotte, Patrick Bolton, Charles Calomiris, Tanja Christ, Frederique Dahan, Steve Drucker, Paolo Fulghieri (the editor), Helmut Herwartz, Laurie Hodrick, Rafael La Porta, Hagit Levy, Francisco Perez-Gonzalez, Maria Guadalupe, Wei Jiang, Bentley MacLeod, Steven Ongena, Daniel Paravisini, Mark Ramseyer, Bernard Salanié, Yuthika Sharma, Andrei Shleifer, Paul Wachtel, Daniel Wolfenzon, and three anonymous referees for their helpful comments. We would also like to thank the seminar participants at the American Law and Economics Association (NYU), LBS Doctoral Conference, Columbia Business School, EFA Moscow Meeting, Columbia Law School, NYU Stern, and Penn/NYU Conference on Law and Finance. The usual disclaimer on errors applies here as well.