Abstract

http://ssrn.com/abstract=2448091
 


 



Does Law and Finance Matter? Lessons from Externally Imposed Courts


James R. Brown


Iowa State University - Department of Finance

J. Anthony Cookson


University of Colorado at Boulder - Leeds School of Business

Rawley Heimer


Brandeis University - International Business School

October 1, 2014


Abstract:     
This paper provides novel evidence on the causal connections between legal institutions, credit markets and real economic activity. Our analysis exploits an unexplored within-country setting -- Native American reservations -- together with quasi-experimental variation in legal contract enforcement wherein the US Congress externally assigned state courts to adjudicate contracts on a subset of reservations. According to area-specific data on small business and household credit, reservations assigned to state courts, which enforce contracts more predictably than tribal courts, have stronger credit markets. Moreover, the law-driven component of credit market development is associated with significantly higher levels of per capita income, with stronger effects in sectors that depend more on external financing. By using exogenous variation in legal institutions across relatively-similar sovereign entities, our study offers compelling evidence that stronger contract enforcement and better-developed credit markets lead to significant improvements in broad economic outcomes.

Number of Pages in PDF File: 45

Keywords: law and finance, courts, small business credit, credit markets, contract enforcement, Native American reservations

JEL Classification: G00, K00, G21

working papers series


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Date posted: June 10, 2014 ; Last revised: October 1, 2014

Suggested Citation

Brown, James R. and Cookson, J. Anthony and Heimer, Rawley, Does Law and Finance Matter? Lessons from Externally Imposed Courts (October 1, 2014). Available at SSRN: http://ssrn.com/abstract=2448091 or http://dx.doi.org/10.2139/ssrn.2448091

Contact Information

James R. Brown
Iowa State University - Department of Finance ( email )
College of Business
Ames, IA 50011-2063
United States
J. Anthony Cookson (Contact Author)
University of Colorado at Boulder - Leeds School of Business ( email )
Boulder, CO 80309-0419
United States
Rawley Heimer
Brandeis University - International Business School ( email )
Mailstop 32
Waltham, MA 02454-9110
United States
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