Law and Finance Matter: Lessons from Externally Imposed Courts

Review of Financial Studies, Forthcoming

52 Pages Posted: 10 Jun 2014 Last revised: 28 Dec 2016

James R. Brown

Iowa State University - Department of Finance

J. Anthony Cookson

University of Colorado at Boulder - Leeds School of Business

Rawley Heimer

Federal Reserve Bank of Cleveland

Date Written: November 9, 2015

Abstract

This paper provides novel evidence on the real and financial market effects of legal institutions. Our analysis exploits persistent and externally imposed differences in court enforcement that arose when the U.S. Congress assigned state courts to adjudicate contracts on a subset of Native American reservations. Using 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 per capita income, with stronger effects in sectors that depend more on external financing.

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

JEL Classification: G21, K40, P48

Suggested Citation

Brown, James R. and Cookson, J. Anthony and Heimer, Rawley, Law and Finance Matter: Lessons from Externally Imposed Courts (November 9, 2015). Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2448091 or http://dx.doi.org/10.2139/ssrn.2448091

James R. Brown

Iowa State University - Department of Finance ( email )

College of Business
Ames, IA 50011-2063
United States
5152944668 (Phone)

J. Anthony Cookson (Contact Author)

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

Rawley Heimer

Federal Reserve Bank of Cleveland ( email )

Mailstop 32
Waltham, MA 02454-9110
United States

Paper statistics

Downloads
273
Rank
91,016
Abstract Views
1,631