Which Creditors’ Rights Drive Financial Deepening and Economic Development?

9 Pages Posted: 20 Jan 2017

See all articles by Charles W. Calomiris

Charles W. Calomiris

Columbia University - Columbia Business School; National Bureau of Economic Research (NBER)

Mauricio Larrain

Columbia University

Jose Maria Liberti

Northwestern University - Kellogg School of Management; DePaul University

Jason Sturgess

Queen Mary University of London

Date Written: Fall 2016

Abstract

Since the 1990s financial economists have documented the essential role of creditors' rights in encouraging lenders to provide credit. This article demonstrates the central importance of creditors' ability to use movable assets such as inventories and accounts receivable (as distinct from immovable assets like real estate) as collateral when lending to business enterpriseses. Using a unique cross‐country, micro‐level loan data set that contains loan‐to‐value ratios for different assets, the authors found that the loan‐to‐values of loans that are collateralized with movable assets were lower in countries with weak collateral laws for movable assets, and that lending in such countries was biased toward the use of immovable assets. Using sector‐level data, the authors also found that weak movable collateral laws were associated with distortions in the allocation of resources that favored immovable‐based production and investment. The effects of resources that favored immovable‐based production and investment. The effects of the collateral law reform enacted in Slovakia in 2003 were held up as providing support for the authors' findings. The authors also investigated which aspects of movable assets collateralization regimes are most important for facilitating the use of movable assets as collateral. They concluded that the two critical features of such regimes are the registration of collateral interests — which facilitates monitoring of collateral and avoids double pledging — and the ability of creditors to avoid lengthy court proceedings when taking possession of collateral. These findings suggest that it would be relatively easy for many countries to increase their supply of credit because reforming these aspects of legal regimes is fairly straightforward with few political obstacles.

Suggested Citation

Calomiris, Charles W. and Larrain, Mauricio and Liberti, Jose Maria and Sturgess, Jason, Which Creditors’ Rights Drive Financial Deepening and Economic Development? (Fall 2016). Journal of Applied Corporate Finance, Vol. 28, Issue 4, pp. 53-59, 2016. Available at SSRN: https://ssrn.com/abstract=2902365 or http://dx.doi.org/10.1111/jacf.12202

Charles W. Calomiris (Contact Author)

Columbia University - Columbia Business School ( email )

3022 Broadway
601 Uris, Dept. of Finance & Economics
New York, NY 10027
United States
212-854-8748 (Phone)
212-316-9219 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Mauricio Larrain

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Jose Maria Liberti

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Jacobs 4203
Evanston, IL 60208
United States
(847) 491-5861 (Phone)
(847) 491-5719 (Fax)

HOME PAGE: http://www.kellogg.northwestern.edu/faculty/directory/liberti_jose.aspx

DePaul University ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States
(312) 362-8739 (Phone)
(312) 362-6566 (Fax)

Jason Sturgess

Queen Mary University of London ( email )

Mile End Rd
Mile End Road
London, London E1 4NS
United Kingdom

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