Access to Collateral and the Democratization of Credit: France's Reform of the Napoleonic Code

Abstract

We exploit wrinkles of a contracting framework to show how access to collateral shapes the composition of corporate borrowing and the demographics of credit access. France's Ordonnance 2006-346 repudiated the 200-year old Napoleonic security code, easing the pledge of hard assets in a country where corporate credit was highly concentrated. The reform was undermined by "non-codified" laws pushed by firms in large cities, which allowed them to pledge liquid assets to factoring companies. Using a differences-test strategy, we show that firms with high utilization of hard assets and limited access to factoring services increased their leverage ratios following the reform (intensive margin), with the fraction of "zero-leverage" firms among them dropping from 89% to 29% (extensive margin). Using contract-level data, we show that hard assets allowed for significant reductions in loan mark-ups and increases in loan maturities. Small, profitable, low-risk firms benefited the most from derogating the Napoleonic code. Start-up firms registered unprecedented increases in the use of debt financing at incorporation. Department-level analysis allows us to map the effects of Ordonnance 2006-346 on credit access inequality within and across different areas of the country. The reform reached firms in rural areas, leading to a pronounced decline in the Gini index of credit access inequality across France's countryside.

Keywords: Security Laws, Contractibility, Collateral, Capital Structure, Bank Loans, Welfare

JEL Classification: G32, K22, O16