Do Court Delays Distort Capital Formation?

60 Pages Posted: 8 Jul 2020 Last revised: 20 Jul 2020

See all articles by Pantelis Koutroumpis

Pantelis Koutroumpis

Oxford Martin Programme of Technological and Economic Change; University of Oxford - Institute for New Economic Thinking at the Oxford Martin School; Imperial College Business School

Farshad Ravasan

University of Oxford - Oxford Martin School

Date Written: July 17, 2020

Abstract

Weak enforcement of financial contracts often distorts the incentive to invest and delays efforts to catch up with the technology frontier. We study how longer bankruptcy trials affect the size, structure and allocation of corporate capital across different regions in Italy. We take advantage of an exogenous change in local courts’ efficiency caused by the reorganization of judicial districts under the legislative reform of 2012. Using an instrumental variable strategy, we find that the change in length of bankruptcy proceedings had a strong impact on firm-level outcomes. Our estimates show that the interquantile reduction in the length of bankruptcy trials increases the firm’s capital stock and capital intensity of production by 9.7% to 11.5%. Significantly, our results provide two novel findings on financial market effects of legal institutions. Fist, we find that poor enforcement of financial contracts leads firms to under-allocate capital in their intangible assets. Second, our results show that court delays exacerbate misallocation by preventing the optimal allocation of physical and intangible assets towards firms with high capital return.

Keywords: court enforcement, bankruptcy proceedings, corporate intangible capital, misallocation, corporate debt overhang

JEL Classification: E22, G33, K40, O16

Suggested Citation

Koutroumpis, Pantelis and Ravasan, Farshad, Do Court Delays Distort Capital Formation? (July 17, 2020). Available at SSRN: https://ssrn.com/abstract=3626468 or http://dx.doi.org/10.2139/ssrn.3626468

Pantelis Koutroumpis

Oxford Martin Programme of Technological and Economic Change ( email )

University of Oxford
34 Broad Street
Oxford, OX1 3BD
United Kingdom
01865610388 (Phone)
OX1 3BD (Fax)

University of Oxford - Institute for New Economic Thinking at the Oxford Martin School ( email )

Eagle House
Walton Well Road
Oxford, OX2 6ED
United Kingdom

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

Farshad Ravasan (Contact Author)

University of Oxford - Oxford Martin School ( email )

University of Oxford
34 Broad Street
Oxford, OX1 3BD
United Kingdom

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