IDEAS home Printed from https://ideas.repec.org/p/bdi/wptemi/td_1322_21.html
   My bibliography  Save this paper

Judicial efficiency and bank credit to firms

Author

Listed:
  • Giacomo Rodano

    (Bank of Italy)

Abstract

This paper analyses empirically the effect of judicial efficiency on bank credit contractual terms for the universe of Italian corporations borrowing from the banking sector. Exploiting within-country variation in the length of bankruptcy proceedings across different jurisdictions, the paper uses a spatial regression discontinuity design that compares credit conditions applied to firms located in municipalities on different sides of jurisdiction borders, controlling for bank characteristics. The results show that judicial efficiency is associated with a reduction in the cost of credit as well as with an increase in its availability for firms, in particular for those at high risk of default. Judicial efficiency increases leverage and investment for high risk firms. All these results suggest that the banking system tilts credit conditions in favor of safe firms as court inefficiency increases. Finally, court efficiency is also associated with a reduction in both the stock and the flow of Non Performing Loans.

Suggested Citation

  • Giacomo Rodano, 2021. "Judicial efficiency and bank credit to firms," Temi di discussione (Economic working papers) 1322, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1322_21
    as

    Download full text from publisher

    File URL: https://www.bancaditalia.it/pubblicazioni/temi-discussione/2021/2021-1322/en_tema_1322.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Kee‐Hong Bae & Vidhan K. Goyal, 2009. "Creditor Rights, Enforcement, and Bank Loans," Journal of Finance, American Finance Association, vol. 64(2), pages 823-860, April.
    2. Sujata Visaria, 2009. "Legal Reform and Loan Repayment: The Microeconomic Impact of Debt Recovery Tribunals in India," American Economic Journal: Applied Economics, American Economic Association, vol. 1(3), pages 59-81, July.
    3. Jappelli, Tullio & Pagano, Marco & Bianco, Magda, 2005. "Courts and Banks: Effects of Judicial Enforcement on Credit Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(2), pages 223-244, April.
    4. Giacomo Rodano & Nicolas Serrano-Velarde & Emanuele Tarantino, 2018. "Lending Standards over the Credit Cycle," The Review of Financial Studies, Society for Financial Studies, vol. 31(8), pages 2943-2982.
    5. Sandra E. Black, 1999. "Do Better Schools Matter? Parental Valuation of Elementary Education," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(2), pages 577-599.
    6. Enrica Detragiache & Paolo Garella & Luigi Guiso, 2000. "Multiple versus Single Banking Relationships: Theory and Evidence," Journal of Finance, American Finance Association, vol. 55(3), pages 1133-1161, June.
    7. Gregory S. Crawford & Nicola Pavanini & Fabiano Schivardi, 2018. "Asymmetric Information and Imperfect Competition in Lending Markets," American Economic Review, American Economic Association, vol. 108(7), pages 1659-1701, July.
    8. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2004. "The Role of Social Capital in Financial Development," American Economic Review, American Economic Association, vol. 94(3), pages 526-556, June.
    9. Fabio Schiantarelli & Massimiliano Stacchini & Philip E. Strahan, 2020. "Bank Quality, Judicial Efficiency, and Loan Repayment Delays in Italy," Journal of Finance, American Finance Association, vol. 75(4), pages 2139-2178, August.
    10. Silvia Giacomelli & Sauro Mocetti & Giuliana Palumbo & Giacomo Roma, 2017. "Civil justice in Italy: recent trends," Questioni di Economia e Finanza (Occasional Papers) 401, Bank of Italy, Economic Research and International Relations Area.
    11. Djankov, Simeon & McLiesh, Caralee & Shleifer, Andrei, 2007. "Private credit in 129 countries," Journal of Financial Economics, Elsevier, vol. 84(2), pages 299-329, May.
    12. Emilia Bonaccorsi di Patti, 2009. "Weak institutions and credit availability: the impact of crime on bank loans," Questioni di Economia e Finanza (Occasional Papers) 52, Bank of Italy, Economic Research and International Relations Area.
    13. Jacopo Ponticelli & Leonardo S. Alencar, 2016. "Court Enforcement, Bank Loans, and Firm Investment: Evidence from a Bankruptcy Reform in Brazil," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(3), pages 1365-1413.
    14. 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 1131-1150, July.
    15. Fabio Schiantarelli & Massimiliano Stacchini & Philip E. Strahan, 2017. "Bank quality, judicial efficiency and borrower runs: loan repayment delays in Italy," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Uses of central balance sheet data offices' information, volume 45, Bank for International Settlements.
    16. Oliver Hart & John Moore, 1998. "Default and Renegotiation: A Dynamic Model of Debt," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(1), pages 1-41.
    17. Silvia Giacomelli & Carlo Menon, 2017. "Does weak contract enforcement affect firm size? Evidence from the neighbour’s court," Journal of Economic Geography, Oxford University Press, vol. 17(6), pages 1251-1282.
    18. Matthieu Chemin, 2012. "Does Court Speed Shape Economic Activity? Evidence from a Court Reform in India," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 28(3), pages 460-485, August.
    19. Josh Lerner & Antoinette Schoar, 2005. "Does Legal Enforcement Affect Financial Transactions? The Contractual Channel in Private Equity," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(1), pages 223-246.
    20. Federico Cingano & Francesco Manaresi & Enrico Sette, 2016. "Does Credit Crunch Investment Down? New Evidence on the Real Effects of the Bank-Lending Channel," The Review of Financial Studies, Society for Financial Studies, vol. 29(10), pages 2737-2773.
    21. Matteo Accornero & Piergiorgio Alessandri & Luisa Carpinelli & Alberto Maria Sorrentino, 2017. "Non-performing loans and the supply of bank credit: evidence from Italy," Questioni di Economia e Finanza (Occasional Papers) 374, Bank of Italy, Economic Research and International Relations Area.
    22. Guzmán González-Torres & Giacomo Rodano, 2020. "Court efficiency and aggregate productivity: the credit channel," Temi di discussione (Economic working papers) 1287, Bank of Italy, Economic Research and International Relations Area.
    23. Thomas J. Holmes, 1998. "The Effect of State Policies on the Location of Manufacturing: Evidence from State Borders," Journal of Political Economy, University of Chicago Press, vol. 106(4), pages 667-705, August.
    24. Magda Bianco & Silvia Giacomelli & Cristina Giorgiantonio & Giuliana Palumbo & Bruna Szego, 2007. "La durata (eccessiva) dei procedimenti civili in Italia: offerta, domanda o rito?," Rivista di Politica Economica, SIPI Spa, vol. 97(5), pages 3-54, September.
    25. Jun Qian & Philip E. Strahan, 2007. "How Laws and Institutions Shape Financial Contracts: The Case of Bank Loans," Journal of Finance, American Finance Association, vol. 62(6), pages 2803-2834, December.
    26. Laeven, Luc & Majnoni, Giovanni, 2005. "Does judicial efficiency lower the cost of credit?," Journal of Banking & Finance, Elsevier, vol. 29(7), pages 1791-1812, July.
    27. Emilia Bonaccorsi Di Patti & Giorgio Gobbi, 2007. "Winners or Losers? The Effects of Banking Consolidation on Corporate Borrowers," Journal of Finance, American Finance Association, vol. 62(2), pages 669-695, April.
    28. Paola Sapienza, 2002. "The Effects of Banking Mergers on Loan Contracts," Journal of Finance, American Finance Association, vol. 57(1), pages 329-367, February.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lara Wemans & Manuel Coutinho Pereira, 2022. "Characteristics of parties and duration of insolvency cases in Portugal," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    2. Giorgio Albareto & Michele Cascarano & Stefania De Mitri & Cristina Demma & Roberto Felici & Carlotta Rossi, 2022. "The banking system and the financing of southern Italian firms," Questioni di Economia e Finanza (Occasional Papers) 684, Bank of Italy, Economic Research and International Relations Area.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Vincenzo Pezone, 2023. "The Real Effects of Judicial Enforcement," Review of Finance, European Finance Association, vol. 27(3), pages 889-933.
    2. Juan S. Mora-Sanguinetti & Marta Martínez-Matute & Miguel García-Posada, 2017. "Credit, crisis and contract enforcement: evidence from the Spanish loan market," European Journal of Law and Economics, Springer, vol. 44(2), pages 361-383, October.
    3. Müller, Karsten, 2022. "Busy bankruptcy courts and the cost of credit," Journal of Financial Economics, Elsevier, vol. 143(2), pages 824-845.
    4. Pezone, Vincenzo, 2023. "The real effects of judicial enforcement," Other publications TiSEM 08176032-a171-4f23-8dac-e, Tilburg University, School of Economics and Management.
    5. Calomiris, Charles W. & Larrain, Mauricio & Liberti, José & Sturgess, Jason, 2017. "How collateral laws shape lending and sectoral activity," Journal of Financial Economics, Elsevier, vol. 123(1), pages 163-188.
    6. Giorgio Albareto & Michele Cascarano & Stefania De Mitri & Cristina Demma & Roberto Felici & Carlotta Rossi, 2022. "The banking system and the financing of southern Italian firms," Questioni di Economia e Finanza (Occasional Papers) 684, Bank of Italy, Economic Research and International Relations Area.
    7. Guzmán González-Torres & Giacomo Rodano, 2020. "Court efficiency and aggregate productivity: the credit channel," Temi di discussione (Economic working papers) 1287, Bank of Italy, Economic Research and International Relations Area.
    8. Juliano J. Assunção & Efraim Benmelech & Fernando S. S. Silva, 2014. "Repossession and the Democratization of Credit," The Review of Financial Studies, Society for Financial Studies, vol. 27(9), pages 2661-2689.
    9. Daniel Dejuán & Juan S. Mora-Sanguinetti, 2019. "Quality of enforcement and investment decisions. Firm-level evidence from Spain," Working Papers 1927, Banco de España.
    10. Falavigna, Greta & Ippoliti, Roberto, 2023. "SMEs’ behavior under financial constraints: An empirical investigation on the legal environment and the substitution effect with tax arrears," The North American Journal of Economics and Finance, Elsevier, vol. 66(C).
    11. Rodano, Giacomo & Serrano-Velarde, Nicolas & Tarantino, Emanuele, 2016. "Bankruptcy law and bank financing," Journal of Financial Economics, Elsevier, vol. 120(2), pages 363-382.
    12. Pezone, Vincenzo, 2020. "The real effects of judicial enforcement," SAFE Working Paper Series 192, Leibniz Institute for Financial Research SAFE, revised 2020.
    13. Beutler, Toni & Grobéty, Mathieu, 2019. "The collateral channel under imperfect debt enforcement," European Economic Review, Elsevier, vol. 111(C), pages 336-359.
    14. Lenzu, Simone & Manaresi, Francesco, 2018. "Do Marginal Products Differ from User Costs? Micro-Level Evidence from Italian Firms," Working Papers 276, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
    15. Greta Falavigna & Roberto Ippoliti, 2022. "Financial constraints, investments, and environmental strategies: An empirical analysis of judicial barriers," Business Strategy and the Environment, Wiley Blackwell, vol. 31(5), pages 2002-2018, July.
    16. Decarolis, Francesco & Mattera, Gianpiero & Menon, Carlo, 2020. "Delays at the Border: Court Efficiency and Delays in Public Contracts," CEPR Discussion Papers 14856, C.E.P.R. Discussion Papers.
    17. Papaioannou, Elias & Karatza, Stavroula, 2018. "The Greek Justice System: Collapse and Reform," CEPR Discussion Papers 12731, C.E.P.R. Discussion Papers.
    18. Safavian, Mehnaz & Sharma, Siddharth, 2007. "When do creditor rights work?," Journal of Comparative Economics, Elsevier, vol. 35(3), pages 484-508, September.
    19. Wenli Li & Ishani Tewari & Michelle J. White, 2014. "Using bankruptcy to reduce foreclosures: does strip-down of mortgages affect the supply of mortgage credit?," Working Papers 14-35, Federal Reserve Bank of Philadelphia.
    20. Wenli Li & Ishani Tewari & Michelle J. White, 2019. "Using Bankruptcy to Reduce Foreclosures: Does Strip-Down of Mortgages Affect the Mortgage Market?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 55(1), pages 59-87, February.

    More about this item

    Keywords

    judicial efficiency; creditor rights; loan contractual terms; spatial discontinuity approach;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • K15 - Law and Economics - - Basic Areas of Law - - - Civil Law; Common Law

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bdi:wptemi:td_1322_21. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/bdigvit.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.