Access to Finance: An Unfinished Agenda
Author(s):
Thorsten Beck and Asli Demirgüç-Kunt
Journal:
The World Bank Group Economic Review 3 (22): 383–396, 2008
Abstract:
Recent data compilations show that many poor and non-poor people in many developing countries face a high degree of financial exclusion and high barriers in access to finance. Theory and empirical evidence point to the critical role that improved access to finance has in promoting growth and reducing income inequality. An extensive literature shows the channels through which finance promotes enterprise growth and improves aggregate resource allocation. There is less evidence at the household level, however, and on the effectiveness of policies to overcome financial exclusion. The article summarizes recent efforts to measure and analyze the impact of access to finance and discusses the unfinished research agenda.
Credit Market Imperfections and Persistent Unemployment
Author(s):
Daron Acemoglu
Journal:
European Economic Review 45 (4–6): 665–79, 2001
Abstract:
This paper develops the thesis that credit market frictions may be an important contributor to high unemployment in Europe. When a change in the technological regime necessitates the creation of new firms, this can happen relatively rapidly in the U.S. where credit markets function efficiently. In contrast, in Europe, job creation is constrained by credit market imperfections, so unemployment rises and remains high for an extended period. The data show that there has not been slower growth in the most credit dependent industries in Europe relative to the U.S., but the share of employment in these industries is lower than in the U.S. This suggests that although credit market imperfections are unlikely to have been the major cause of the increase in European unemployment, they may have played some role in limiting European employment growth.
Credit Registries, Relationship Banking, and Loan Repayment
Author(s):
Asli Demirguc-Kunt and Vojislav Maksimovic
Journal:
Journal of Finance 53(6): 2107–37, 1998
Abstract:
We investigate how differences in legal and financial systems affect firms’ use of external financing to fund growth. We show that in countries whose legal systems score high on an efficiency index, a greater proportion of firms use long-term external financing. An active, though not necessarily large, stock market and a large banking sector are also associated with externally financed firm growth. The increased reliance on external financing occurs in part because established firms in countries with well-functioning institutions have lower profit rates. Government subsidies to industry do not increase the proportion of firms relying on external financing.
Credit Reporting, Relationship Banking, and Loan Repayment
Author(s):
Martin Brown and Christian Zehnder
Journal:
Journal of Money, Credit and Banking, Volume 39 Issue 8, Pages 1883 - 1918, 2007
Abstract:
How does information sharing between lenders affect borrowers repayment behavior? We show—in a laboratory credit market—that information sharing increases repayment rates, as borrowers anticipate that a good credit record improves their access to credit. This incentive effect of information sharing is substantial when repayment is not third-party enforceable and lending is dominated by one-shot transactions. If, however, repeat interaction between borrowers and lenders is feasible, the incentive effect of credit reporting is negligible, as bilateral banking relationships discipline borrowers. Information sharing nevertheless affects market outcome by weakening lenders' ability to extract rents from relationships.
Creditor Protection and Credit Response to Shocks*
Author(s):
Arturo José Galindoand Alejandro Micco
Journal:
The World Bank Economic Review: 1–26, 2007
Abstract:
This article studies the relationship between creditor protection and credit responses to macroeconomic shocks. Using a data set on legal determinants of finance in a panel of data on aggregate credit growth for 79 countries during 1990–2004, it is shown that credit is more responsive to external shocks in countries with weak legal creditor protection and weak enforcement. The results are statistically and economically significant and robust to alternative measures of creditor protection, to the inclusion of variables that reflect different stages of economic development, to the restriction of the sample to only developing economies, to the controls for systemic crises, to alternative shock measures, and to vector autoregressive specifications.
Creditor Rights, Enforcement, and Bank Loans
Author(s):
Kee-Hong Bae and Vidhan K. Goyal
Journal:
The Journal of Finance 64(2): 823 - 860, 2009
Abstract:
We examine whether differences in legal protection affect the size, maturity, and interest rate spread on loans to borrowers in 48 countries. Results show that banks respond to poor enforceability of contracts by reducing loan amounts, shortening loan maturities, and increasing loan spreads. These effects are both statistically significant and economically large. While stronger creditor rights reduce spreads, they do not seem to matter for loan size and maturity. Overall, we show that variation in enforceability of contracts matters a great deal more to how loans are structured and how they are priced.
Creditor Rights, Information Sharing, and Bank Risk Taking*
Author(s):
Joel F. Houston, Chen Lin, Ping Lin and Yue Ma
Journal:
Journal of Financial Economics 96(3): 485-512, 2010
Abstract:
Looking at a sample of nearly 2,400 banks in 69 countries, we find that stronger creditor rights tend to promote greater bank risk taking. Consistent with this finding, we also show that stronger creditor rights increase the likelihood of financial crisis. On the plus side, we find that stronger creditor rights are associated with higher growth. In contrast, we find that the benefits of information sharing among creditors appear to be universally positive. Greater information sharing leads to higher bank profitability, lower bank risk, a reduced likelihood of financial crisis, and higher economic growth.
Dividend Policy, Creditor Rights,and the Agency Costs of Debt*
Author(s):
Paul Brockman and Emre Unlu
Journal:
Journal of Financial Economics 2 (92): 276-299, 2009
Abstract:
We show that country-level creditor rights influence dividend policies around the world by establishing the balance of power between debt and equity claimants. Creditors demand and managers consent to a more restrictive payout policy as a substitute for weak creditor rights in an effort to minimize the firm's agency costs of debt. Using a sample of 120,507 firm-years from 52 countries, we find that both the probability and amount of dividend payouts are significantly lower in countries with poor creditor rights. A reduction in the creditor rights index from its highest value to its lowest value implies a 41% reduction in the probability of paying a dividend, and a 60% reduction in dividend payout ratios. These results are robust to numerous control variables, sample variations, model specifications, and alternative hypotheses. We also show that the agency costs of debt play a more decisive role in determining dividend policies than the previously documented agency costs of equity. Overall, our findings contribute to the growing literature arguing that creditors exert significant influence over corporate decision-making outside of bankruptcy.
Finance and Growth: Schumpeter Might Be Right
Author(s):
Robert King and Ross Levine
Journal:
Quarterly Journal of Economics 108 (3): 717–37, 1993
Abstract:
The authors present cross-country evidence consistent with Joseph Schumpeter's view that the financial system can promote economic growth, using data on eighty countries over the 1960-89 period. Various measures of the level of financial development are strongly associated with real per capita GDP growth, the rate of physical capital accumulation, and improvements in the efficiency with which economies employ physical capital. Further, the predetermined component of financial development is robustly correlated with future rates of economic growth, physical capital accumulation, and economic efficiency improvements.
Finance and Inequality: Channels and Evidence
Author(s):
Stijn Claessens and Enrico Perotti
Journal:
Journal of Comparative Economics 35(4):748-773, 2007
Abstract:
We provide a framework to interpret the recent literature on financial development and inequality. In many developing countries, access to funding and financial services by firms and households is still very skewed. Recent evidence suggests that poor access does not only reflect economic constraints but also barriers erected by insiders. Inequality affects the distribution of political influence, so financial regulation often is easily captured by established interests in unequal countries. Captured reforms deepen rather than broaden access, as small elites obtain most of the benefits while risks are socialized. Financial liberalization motivated to increase access may in practice increase fragility and inequality, and lead to political backlash against reforms. Thus financial reforms may succeed only if matched by a buildup in oversight institutions.
Finance and Inequality: Channels and Evidence
Author(s):
Jean Bonnet, Marcus Dejardin and Sylvie Cieply
Journal:
Article provided by ULB - Universite Libre de Bruxelles in its journal 'Brussels Economic Review'. Volume 48, Year 2005, Issue: 3 Pages: 217-246
Abstract:
Financial constraints affecting new firms are some of the factors most cited for impeding entrepreneurial dynamics from flourishing. This article introduces the problem of regional patterns of financial constraints. The research is conducted with regard to the French regions and the new French firms being tracked at the firm level. As regard to new firms, the research relies mainly on the use of the Information System on New Firms (SINE) that is released by the French National Institute of Statistical and Economic Studies (INSEE). The SINE dataset does not refer to the general entrepreneurial intention in the French population but to entrepreneurial projects that are concretized in new firms. As a consequence, entrepreneurial intentions that are aborted due to financial constraints are not reported. The point is of importance as the firm financing conditions are considered. First, an assessment of the global situation of the banking density and activity within and between the French regions leads to the conclusion of a relatively homogeneous banking supply and banking activity, with the activity of the core-region Île-de-France appearing however more contrasted. Second, the financial constraints affecting new firms are distinguished according to a four-case typology. Additionally to the "no credit rationing" situation, "weak" or "strong credit rationing" are distinguished from the "self-constraint" situation, a situation describing the case when firms do not ask for a bank loan although they declare facing financial constraints subsequently. It appears that a majority of new firms is not facing credit rationing, but also that a non-negligible share is "self-constrained". The classification is, third and finally, differentiated according to the regions. Despite the relative homogeneity of the banking supply, it appears that some regional differences may still be at work. The given explanations are still hypothetical at this stage but the empirical results suggest already that the regional dimension should definitely deserve further attention.
Financial Dependence and Growth
Author(s):
Raghuram Rajan and Luigi Zingales
Journal:
American Economic Review 88 (3): 559–86, 1998
Abstract:
This paper examines whether financial development facilitates economic growth by scrutinizing one rationale for such a relationship: that financial development reduces the costs of external finance to firms. Specifically, the authors ask whether industrial sectors that are relatively more in need of external finance develop disproportionately faster in countries with more-developed financial markets. They find this to be true in a large sample of countries over the 1980s. The authors show this result is unlikely to be driven by omitted variables, outliers, or reverse causality.
Financial Development and Economic Growth: Views and Agenda
Author(s):
Ross Levine
Journal:
Journal of Economic Literature 35 (2): 688–726, 1997
Abstract:
This critique argues that the preponderance of theoretical reasoning and empirical evidence suggests a positive, first-order relationship between financial development and economic growth. The body of work would push even most skeptics toward the belief that the development of financial markets and institutions is a critical and inextricable part of the growth process and away from the view that the financial system is an inconsequential sideshow, responding passively to economic growth. Many gaps remain, however, and the paper highlights areas in acute need of additional research.
Financial Intermediation and Delegated Monitoring
Author(s):
Douglas Diamond
Journal:
Review of Economic Studies 51(3): 393–414, 1984
Abstract:
This paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders. It presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary. Diversification within an intermediary serves to reduce these costs, even in a risk neutral economy. The paper presents some more general analysis of the effect of diversification on resolving incentive problems. In the environment assumed in the model, debt contracts with costly bankruptcy are shown to be optimal. The analysis has implications for the portfolio structure and capital structure of intermediaries.
How Law Affects Lending
Author(s):
Rainer Haselmann, Katharina Pistor and Vikrant Vig
Journal:
Review of Financial Studies 23(2):549-580,2010
Abstract:
The paper investigates the effect of legal change on the lending behavior of banks in twelve transition economies. First, we find that banks increase the supply of credit subsequent to legal change. Second, changes in collateral law matter more for increases in bank lending than do changes in bankruptcy law. We attribute this finding to the different functions of collateral and bankruptcy law. While the former enhances the likelihood that individual creditors can realize their claims against a debtor, the latter ensures an orderly process for resolving multiple, and often conflicting, claims after a debtor has become insolvent. Finally, we find that foreign-owned banks respond more strongly to legal change than incumbents.
How Laws and Institutions Shape Financial Contracts: The Case of Bank Loans
Author(s):
Jun Qian and Philip E. Strahan
Journal:
The Journal of Finance,Volume 62 Issue 6, Pages 2803 - 2834, 2007
Abstract:
Legal and institutional differences shape the ownership and terms of bank loans across the world. We show that under strong creditor protection, loans have more concentrated ownership, longer maturities, and lower interest rates. Moreover, the impact of creditor rights on loans depends on borrower characteristics such as the size and tangibility of assets. Foreign banks appear especially sensitive to the legal and institutional environment, with their ownership declining relative to domestic banks as creditor protection falls. Our multidimensional empirical model paints a more complete picture of how financial contracts respond to the legal and institutional environment than existing studies.
Law and Finance
Author(s):
Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny
Journal:
Journal of Political Economy 106 (6): 1113–55, 1998
Abstract:
This paper examines legal rules covering protection of corporate shareholders and creditors, the origin of these rules, and the quality of their enforcement in 49 countries. The results show that common-law countries generally have the strongest, and French civil-law countries the weakest, legal protections of investors, with German- and Scandinavian-civil-law countries located in the middle. We also find that concentration of ownership of shares in the largest public companies is negatively related to investor protections, consistent with the hypothesis that small, diversified shareholders are unlikely to be important in countries that fail to protect their rights. Levine, Ross. 1997. “Financial Development and Economic Growth: Views and Agenda.” Journal of Economic Literature 35 (2): 688–726.
Law, Finance, and Firm Growth
Author(s):
Asli Demirguc-Kunt and Vojislav Maksimovic
Journal:
Journal of Finance 53(6): 2107–37, 1998
Abstract:
We investigate how differences in legal and financial systems affect firms’ use of external financing to fund growth. We show that in countries whose legal systems score high on an efficiency index, a greater proportion of firms use long-term external financing. An active, though not necessarily large, stock market and a large banking sector are also associated with externally financed firm growth. The increased reliance on external financing occurs in part because established firms in countries with well-functioning institutions have lower profit rates. Government subsidies to industry do not increase the proportion of firms relying on external financing.
Nonmarket Institutions for Credit and Risk Sharing in Low-Income Countries
Author(s):
Timothy Besley
Journal:
Journal of Economic Perspectives 9 (3): 115–27, 1995
Abstract:
The design credit and risk institutions in low-income countries provides one of the most exciting testing grounds for theories of contracting with imperfect information and limited enforcement. This paper reviews some of the recent literature, with a special focus on nonmarket institutions that cope with risk and provide credit. This literature attempts to bring together insights from economic theory, especially information economics, contract theory, and mechanism design theory. However, it is also applied, being motivated by the circumstance of the poor countries that their authors have visited and studied.
Private Credit in 129 Countries*
Author(s):
Simeon Djankov, Caralee McLiesh and Andrei Shleifer
Journal:
Journal of Financial Economics 2 (84): 299-329, 2007
Abstract:
We investigate cross-country determinants of private credit, using new data on legal creditor rights and private and public credit registries in 129 countries. We find that both creditor protection through the legal system and information sharing institutions are associated with higher ratios of private credit to GDP, but that the former is relatively more important in the richer countries. An analysis of legal reforms also shows that credit rises after improvements in creditor rights and in information sharing. We also find that creditor rights are remarkably stable over time, contrary to the hypothesis that legal rules are converging. Finally, we find that legal origins are an important determinant of both creditor rights and information sharing institutions. The analysis suggests that public credit registries, which are primarily a feature of French civil law countries, benefit private credit markets in developing countries.
Regulation and Growth*
Author(s):
Siemon Djankov, Caralee McLiesh and Rita Ramalho
Journal:
Economics Letters 92 (3): 395–401, 2006
Abstract:
Using objective measures of business regulations in 135 countries, we establish that countries with better regulations grow faster. Improving from the worst quartile of business regulations to the best implies a 2.3 percentage point increase in annual growth.
The Distributive Impact of Reforms in Credit Enforcement: Evidence From Indian Debt Recovery Tribunals
Author(s):
Ulf von Lilienfeld-Toal, Dilip Mookherjee, Sujata Visaria
Journal:
Econometrica, Volume 80, Issue 2, pages 497–558, March 2012
Abstract:
It is generally presumed that stronger legal enforcement of lender rights increases credit access for all borrowers because it expands the set of incentive compatible loan contracts. This result relies on an assumption that the supply of credit is infinitely elastic. In contrast, with inelastic supply, stronger enforcement generates general equilibrium effects that may reduce credit access for small borrowers and expand it for wealthy borrowers. In a firm-level panel, we find evidence that an Indian judicial reform that increased banks' ability to recover nonperforming loans had such an adverse distributive impact.
The Legal Environment, Banks, and Long-Run Economic Growth
Author(s):
Ross Levine
Journal:
Journal of Money, Credit, and Banking 30 (3): 596–613, 1998
Abstract:
This paper examines the relationship between the legal system and banking development and traces this connection through to long-run rates of per capita GDP growth, capital stock growth, and productivity growth. The data indicate that countries where the legal system (1) emphasizes creditor rights and (2) rigorously enforces contracts have better developed banks than countries where laws do not give a high priority to creditors and where enforcement is lax. Furthermore, the exogenous component of banking development—the component defined by the legal environment—is positively and robustly associated with per capita growth, physical capital accumulation, and productivity growth.
Where does microfinance flourish? Microfinance institution performance in macroeconomic context
Author(s):
Christian Ahlin, Jocelyn Lin and Michael Maio
Journal:
Journal of Development Economics, Volume 95, Issue 2, Pages 105-120, 2011
Abstract:
We study whether and how the success of microfinance institutions (“MFI"s) depends on the country-level context, in particular macroeconomic and macro-institutional features. Understanding these linkages can make MFI evaluation more accurate and, further, can help to locate microfinance in the broader picture of economic development. We collect data on 373 MFIs and merge it with country-level economic and institutional data. Evidence arises for complementarity between MFI performance and the broader economy. For example, MFIs are more likely to cover costs when growth is stronger; and MFIs in financially deeper economies have lower default and operating costs, and charge lower interest rates. There is also evidence suggestive of substitutability or rivalry. For example, more manufacturing and higher workforce participation are associated with slower growth in MFI outreach. Overall, the country context appears to be an important determinant of MFI performance; MFI performance should be handicapped for the environment in which it was achieved.