The ex-ante Effect of Law and Judicial Efficiency on Borrower Discouragement: An International Evidence

Asia-Pacific Journal of Financial Studies (2021) 50, 176–209 doi:10.1111/ajfs.12334

34 Pages Posted: 2 Aug 2021

See all articles by Safiullah Khan

Safiullah Khan

Kohat University of Science & Technology (KUST)

Naimat Ullah Khan

Institute of Management Studies University of Peshawar Pakistan

Asad Ullah

Kohat University of Science & Technology (KUST)

Date Written: June 1, 2021

Abstract

We investigate whether cross-country differences in the legal system influence demand-side
credit constraints. We explore the notion of discouraged borrowers — firms that choose not
to apply for bank credit because they anticipate rejection. Employing survey data from 46
economies, we find that rapid and less costly court proceedings, lower procedural complexity
in court processes, and higher recovery rates under bankruptcy lead to the lower likelihood
of borrower discouragement. These results are more pronounced in countries with strong
creditor protections in relation to company reorganization and liquidation. The results corroborate
the supply-side view that strong creditor rights and their efficient enforceability alleviate
banks’ participation constraints in the loan market, thereby encouraging small and
medium-sized enterprises to apply for credit in the first place. We also find that differences
in institutional settings, such as higher regulatory quality, better control of corruption, and
the rule of law, lead to lower rates of credit self-rationing in the loan market.

Keywords: borrower discouragement; credit self-rationing; judicial efficiency; creditor legal rights

JEL Classification: K12, K41, G21, G41

Suggested Citation

Khan, Safiullah and Khan, Naimat Ullah and Ullah, Asad, The ex-ante Effect of Law and Judicial Efficiency on Borrower Discouragement: An International Evidence (June 1, 2021). Asia-Pacific Journal of Financial Studies (2021) 50, 176–209 doi:10.1111/ajfs.12334, Available at SSRN: https://ssrn.com/abstract=3895697

Safiullah Khan (Contact Author)

Kohat University of Science & Technology (KUST) ( email )

Kohat
Near Jarma Bridge
Kohat
Pakistan

Naimat Ullah Khan

Institute of Management Studies University of Peshawar Pakistan ( email )

Institute of Management Studies
University of Peshawar
Peshawar, KP 25000
Pakistan

Asad Ullah

Kohat University of Science & Technology (KUST) ( email )

Bannu Road
Near Jarma Bridge
Kohat
Pakistan

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