Enhancing the Contracting Space: Collateral Menus, Access to Credit, and Economic Activity
Cornell University; National Bureau of Economic Research (NBER)
June 23, 2014
Columbia Business School Research Paper No. 13-86
A recent wave of reforms across Eastern European countries gave more flexibility and information for parties to engage in secured debt transactions, also reducing court involvement. Critically, the menu of assets accepted as pledges in secured transactions was increased to include "movable assets" (e.g., machinery and equipment). Contrasting firms operating in industries with differential use of movable and immovable assets, difference-in differences tests show that firms operating more movable assets borrowed more, invested more, hired more, and became more efficient and profitable following those changes in contracting. The reforms also democratized access to credit, with more firms (particularly small ones) abandoning their zero-leverage status. Notably, results are modulated by the level of efficiency of local courts, with larger credit expansion taking place in jurisdictions where courts were previously less efficient. The financial deepening we document triggered important capital and employment reallocation effects: Firms whose assets are most sensitive to the reform observe a sharp increase in their share of capital stock and employment in the economy.
Number of Pages in PDF File: 46
Keywords: Contractibility, collateral, capital structure, credit availability, real activity
JEL Classification: G32, K22, O16
Date posted: November 22, 2013 ; Last revised: June 24, 2014
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