Banks' Reactions to Creditor Rights Changes

57 Pages Posted: 11 Sep 2020

See all articles by Marco Ghitti

Marco Ghitti

SKEMA Business School - Université Côte d’Azur

Florencio Lopez de Silanes

SKEMA Business School; National Bureau of Economic Research (NBER)

Rafael Matta

SKEMA Business School - Université Côte d'Azur

Date Written: July 30, 2020

Abstract

We study how banks adjust their portfolios in response to a deterioration in creditor rights. We construct a comprehensive creditor rights index based on a series of quasi-natural experiments in Italy and exploit a unique proprietary credit-level database of one of the largest Italian banks. Our data includes the universe of the bank’s portfolio over time, allowing us to provide evidence on the banks’ reaction to changes in creditor rights. We document a fall in recovery rates, an increase in interest rates, and a reduction in credit. There is also a movement away from smaller firms and towards secured loans with floating rates. Features such as the strength of lending relationships and the bank’s market power mitigate the magnitudes of these responses. Our analysis reveals that these features constitute important tools to attenuate the effect of poor creditor rights on firms’ access to financing. Our results support the seminal works of Rajan (1992) and Petersen and Rajan (1995).

Keywords: Creditor Rights, SME, Relationship Lending, Bank Power

JEL Classification: G21, G28, G33, G38

Suggested Citation

Ghitti, Marco and Lopez de Silanes, Florencio and Matta, Rafael, Banks' Reactions to Creditor Rights Changes (July 30, 2020). Available at SSRN: https://ssrn.com/abstract=3663845 or http://dx.doi.org/10.2139/ssrn.3663845

Marco Ghitti (Contact Author)

SKEMA Business School - Université Côte d’Azur

Esplanade Mona Lisa
- Courbevoie -
Paris La Défense, 92916
France

Florencio Lopez de Silanes

SKEMA Business School ( email )

Avenue Willy Brandt, Euralille
Lille, 59777
France

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Rafael Matta

SKEMA Business School - Université Côte d'Azur ( email )

60 rue Dostoïevski
Sophia Antipolis, 06902
France

HOME PAGE: http://https://sites.google.com/site/almeidadamatta/

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