The Cost and Benefits of the Strict Protection of Creditor Rights: Theory and Evidence

49 Pages Posted: 19 Apr 2011

See all articles by Jorge Padilla

Jorge Padilla

Compass Lexecon

Alejandro Requejo

Universidad Carlos III de Madrid - Department of Business Administration

Date Written: May 2000

Abstract

We first review the existing theories on the implications of the various regulations that protect creditors. We then empirically investigate the cost and benefits of the strict protection of creditors` rights. Building on the sample of 49 countries developed by La Porta et al. (1998), we study the impact on debt volume, interest rates and default rates of both an aggregate measure of the degree of protection of creditor rights and efficiency of the judicial system. We confirm previous results showing that an effective judicial system is crucial for the development and optimal performance of the credit market. Yet, in contrast to previous studies, we find no conclusive evidence on the sign and magnitude of the effect of creditors` rights protection on credit market efficiency. Instead, macroeconomic stability appears to be crucial for the outgrowth of wide debt markets.

Suggested Citation

Padilla, Jorge and Requejo, Alejandro, The Cost and Benefits of the Strict Protection of Creditor Rights: Theory and Evidence (May 2000). IDB Working Paper No. 114. Available at SSRN: https://ssrn.com/abstract=1814659 or http://dx.doi.org/10.2139/ssrn.1814659

Jorge Padilla (Contact Author)

Compass Lexecon ( email )

Paseo de la Castellana 7
Madrid, 28046
Spain

Alejandro Requejo

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain
34 91 624 9817 (Phone)
34 91 624 9608 (Fax)

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