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Research on Getting Credit

Doing Business considers the following list of papers as relevant for research on the importance of creditor rights and sharing of credit information. Some papers—denoted with an asterisk (*)—use Doing Business data for their empirical analysis. If we've missed any important research, please let us know.

Author(s): Bueyuekkarabacak, Berrak; Valev, Neven

Journal: Journal of Macroeconomics, Volume 34, Issue 3, Pages 788-800, September 2012

Abstract: We study the effect of credit information sharing on the likelihood of banking crises using a comprehensive cross-country dataset for the period from 1975 to 2006. The empirical analysis shows that credit information sharing reduces the likelihood of banking crises and it does more so in low income countries. The effect is statistically and economically significant, and applies to both public registries and private bureaus. Furthermore, we show that credit information sharing reduces the impact of rapid credit growth on banking crises. Specifically, rapid credit growth is less likely to lead to a banking crisis in countries with credit information sharing.

Author(s): Giannetti, Caterina; Jentzsch, Nicola

Journal: Journal of International Money and Finance, Volume 33, Pages 60-80, March 2013

Abstract: Credit reporting systems are an important ingredient for financial markets. These systems are based upon the unique identification of borrowers, which is enabled if a compulsory national identification system exists in a country. We present evidence derived from difference-in-difference analyses on the impact of credit reporting and identification systems on financial intermediation in 172 countries between 2000 and 2008. Our results suggest that the introduction of a mandatory identification system has a positive effect on financial intermediation (bank credit to deposits, net interest margins) and financial access (private credit to GDP), especially in countries where there is also a credit reporting system.

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.

Author(s): Joel F. Houston, Chen Lin, Ping Lin and Yue Ma

Journal: Journal of Financial Economics, Volume 96, Issue 3, June 2010, Pages 485-512

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.

Author(s): Rainer Haselmann, Katharina Pistor and Vikrant Vig

Journal: Review of Financial Studies 2010 23(2):549-580; doi:10.1093/rfs/hhp073

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.

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.

Author(s): Doblas-Madrid, Antonio; Minetti, Raoul

Journal: Journal of Financial Economics, Volume 109, Issue 1, Pages 198-223, July 2013

Abstract: We investigate the impact of lenders' information sharing on firms' performance in the credit market using rich contract-level data from a U.S. credit bureau. The staggered entry of lenders into the bureau offers a natural experiment to identify the effect of lenders' improved access to information. Consistent with the predictions of Padilla and Pagano (1997, 2000) and Pagano and Jappelli (1993), we find that information sharing reduces contract delinquencies and defaults, especially when firms are informationally opaque. The results also reveal that information sharing does not reduce the use of guarantees, that is, it may not loosen lending standards. (C) 2013 Elsevier B.V.

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.

Author(s): Maria Soledad, Martinez Peria and Sandeep Singh

Journal: World Bank Policy Research Working Paper

Abstract: This paper analyzes the impact of introducing credit information-sharing systems on firms' access to finance. The analysis uses multi-year, firm-level surveys for 63 countries covering more than 75,000 firms over the period 2002-13. The results reveal that credit bureau reforms, but not credit registry reforms, have a significant and robust effect on firm financing. After the introduction of a credit bureau, the likelihood that a firm has access to finance increases, interest rates drop, maturity lengthens, and the share of working capital financed by banks increases. The effects of credit bureau reforms are more pronounced the greater the coverage of the credit bureau and the scope and accessibility of the credit information-sharing scheme. Credit bureau reforms also have a greater impact on firms' access to finance in countries where contract enforcement is weaker. Finally, there is some evidence that the effects of credit bureau reform are more pronounced for smaller, less experienced, and more opaque firms.

Author(s): Beck, Thorsten; Lin, Chen; Ma , Yue

Journal: Journal of Finance, 2013

Abstract: Tax evasion is a wide-spread phenomenon across the globe and even an important factor of the ongoing sovereign debt crisis. We show that firms in countries with better credit information sharing systems and higher branch penetration evade taxes to a lesser degree. This effect is stronger for smaller firms, firms in smaller cities and towns, firms in industries relying more on external financing, and firms in industries and countries with greater growth potential. This effect is robust to instrumental variable analysis, controlling for firm fixed effects in a smaller panel dataset of countries, and many other robustness tests.

Author(s): Demirgüç-Kunt, Asli; Horváth, Bálint L.; Huizinga, Harry 

Journal: World Bank Economic Review 

Abstract: This paper examines how the ability to access long-term debt affects firm-level growth volatility. The analysis finds that firms in industries with stronger preference to use long-term finance relative to short-term finance experience lower growth volatility in countries with better-developed financial systems, as these firms may benefit from reduced refinancing risk. Institutions that facilitate the availability of credit information and contract enforcement mitigate the refinancing risk and therefore growth volatility associated with short-term financing. Increased availability of long-term finance reduces growth volatility in crisis as well as non-crisis periods.

Author(s):  Ayyagari, Meghana; Juarros, Pedro; Martinez Peria, Maria Soledad; Singh, Sandeep

Journal: World Bank Publications

Abstract: This paper investigates the effect of access to finance on job growth in 50,000 firms across 70 developing countries. Using the introduction of credit bureaus as an exogenous shock to the supply of credit, the paper finds that increased access to finance results in higher employment growth, especially among micro, small, and medium enterprises. The results are robust to using firm fixed effects, industry measures of external finance dependence, and propensity score matching in a complementary panel data set of more than four million firms in 29 developing countries. The findings have implications for policy interventions targeted to produce job growth in micro, small, and medium enterprises.

Author(s): Vig, Vikrant

Journal: Journal of Finance, Volume 68, Issue 3, Pages 881-928, June 2013

Abstract: We investigate how firms respond to strengthening of creditor rights by examining their financial decisions following a securitization reform in India. We find that the reform led to a reduction in secured debt, total debt, debt maturity, and asset growth, and an increase in liquidity hoarding by firms. Moreover, the effects are more pronounced for firms that have a higher proportion of tangible assets because these firms are more affected by the secured transactions law. These results suggest that strengthening of creditor rights introduces a liquidation bias and documents how firms alter their debt structures to contract around it.

Author(s): Manova, Kalina

Journal: Review of Economic Studies, Volume 80, Issue 2, Pages 711-744, April 2013

Abstract: Financial market imperfections severely restrict international trade flows because exporters require external capital. This article identifies and quantifies the three mechanisms through which credit constraints affect trade: the selection of heterogeneous firms into domestic production, the selection of domestic manufacturers into exporting, and the level of firm exports. I incorporate financial frictions into a heterogeneous-firm model and apply it to aggregate trade data for a large panel of countries. I establish causality by exploiting the variation in financial development across countries and the variation in financial vulnerability across sectors. About 20%-25% of the impact of credit constraints on trade is driven by reductions in total output. Of the additional, trade-specific effect, one-third reflects limited firm entry into exporting, while two-thirds are due to contractions in exporters' sales. Financially developed economies export more in financially vulnerable sectors because they enter more markets, ship more products to each destination, and sell more of each product. These results have important policy implications for less developed nations that rely on exports for economic growth but suffer from weak financial institutions.

Author(s): Kee-Hong Bae and Vidhan K.Goyal

Journal: The Journal of Finance, Volume 64 Issue 2, Pages 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.

Author(s): Luc Laeven, Stelios Michalopoulose, Ross Levine

Journal: Journal of Financial Intermediation

Abstract: Is financial innovation necessary for sustaining economic growth? To address this question, we build a Schumpeterian model in which entrepreneurs earn profits by inventing better goods and profit-maximizing financiers arise to screen entrepreneurs. The model has two novel features. First, financiers engage in the costly but potentially profitable process of innovation: they can invent better methods for screening entrepreneurs. Second, every screening process becomes less effective as technology advances. The model predicts that technological innovation and economic growth eventually stop unless financiers innovate. Empirical evidence is consistent with this dynamic, synergistic model of financial and technological innovation.

Author(s): Beltrattia, Andrea; Paladinoc, Giovanna

Journal: Journal of Empirical Finance 

Abstract: Banks use internal models to optimize risk weights and better account for the specific risk of each asset. As the choice of risk weights affects the regulatory capital ratio, economic theory suggests that banks with a higher cost of equity should be more aggressive in reducing risk weights. We consider a large panel of international banks and find that, after controlling for a number of bank and country characteristics and contrary to what happens for a non-Basel II bank, for a Basel II bank a higher cost of equity is not associated with a higher ratio between risk-weighted assets and total assets. These results are obtained in the context of state-of-the-art endogeneity-robust econometric procedures and across several specifications. We propose an indicator of risk weights saving and assess its impact on several performance measure during the 2008–2009 and the 2010–2012 crises. We find that for European banks not located in peripheral countries, a higher degree of RWA-saving is associated with more equity raising during the European crisis, more volatility, and lower distance-to-default. European banks located in peripheral countries engaged less strongly in RWA-saving than European banks located in core countries, and its impact on the various performance measures is almost non-existent, except for a decrease in the distance-to-default.

Author(s): Allen, Franklin; Demirguc-Kuntc, Asli; Klapperc, Leora; Martinez Periac, Maria Soledad

Journal: Journal of Financial Intermediation 

Abstract: Financial inclusion—defined as the use of formal accounts—can bring many benefits to individuals. Yet, we know very little about the factors underpinning it. This paper explores the individual and country characteristics associated with financial inclusion and the policies that are effective among those most likely to be excluded: poor, rural, female or young individuals. Overall, we find that greater financial inclusion is associated with lower account costs, greater proximity to financial intermediaries, stronger legal rights, and more politically stable environments. However, the effectiveness of policies to promote inclusion varies depending on the characteristics of the individuals considered. 

Author(s): Amendola, Alessandra; Boccia, Marinella; Mele, Gianluca; Sensini, Luca

Journal: World Bank Economic Review

Abstract: This paper evaluates the impact of access to credit from banks and other financial institutions on household welfare in Mauritania. Micro-level data from a 2014 household survey are used to evaluate the relationship between credit access, a range of household characteristics, and welfare indicators. To address potential endogeneity issues, the household isolation level is used to instrument access to credit. The results show that households headed by older, more educated people are more likely to access financial services, as are households located in urban areas. In addition, greater financial access appears to be associated with a reduced dependence on household production and increased investment in human capital.

Author(s): Čihák, Martin; Mare, Davide S.; Melecky, Martin

Journal: World Bank Economic Review 

Abstract: Policy makers and regulators have devoted much effort to reforms aimed at improving financial stability in response to lessons from the 2007–09 crisis. At the same time, much effort has also been directed to promoting greater financial inclusion as an enabler of equal opportunity. To some extent, these endeavors have been exerted in silos, neglecting the possibility that financial inclusion and financial stability could be significantly intertwined, positively or negatively. If there are synergies or trade-offs between inclusion and stability, policy decisions must be informed, and the policy setting, design, and implementation adjusted accordingly. This paper (i) discusses the relationship between financial inclusion and stability, (ii) illustrates empirically interactions between the two financial sector outcomes, and (iii) outlines policy challenges stemming from these interactions.Banks use internal models to optimize risk weights and better account for the specific risk of each asset. As the choice of risk weights affects the regulatory capital ratio, economic theory suggests that banks with a higher cost of equity should be more aggressive in reducing risk weights. We consider a large panel of international banks and find that, after controlling for a number of bank and country characteristics and contrary to what happens for a non-Basel II bank, for a Basel II bank a higher cost of equity is not associated with a higher ratio between risk-weighted assets and total assets. These results are obtained in the context of state-of-the-art endogeneity-robust econometric procedures and across several specifications. We propose an indicator of risk weights saving and assess its impact on several performance measure during the 2008–2009 and the 2010–2012 crises. We find that for European banks not located in peripheral countries, a higher degree of RWA-saving is associated with more equity raising during the European crisis, more volatility, and lower distance-to-default. European banks located in peripheral countries engaged less strongly in RWA-saving than European banks located in core countries, and its impact on the various performance measures is almost non-existent, except for a decrease in the distance-to-default.

Author(s): Kant, Chander

Journal: JOURNAL OF POLICY MODELING

Abstract: Economists have recently emphasized Solow growth factors, physical capital, labor, and technology (“proximate” causes) depend on fundamentals like geography, culture, and institutions. I consider one of these fundamentals, institutions, and analyze whether they are malleable by a contemporary economic variable, globalization. The globalization I consider is of production through multinational corporations. Using the recently available data on institutional quality for almost all countries, I show institutional quality is higher with a greater FDI presence in developing countries. Nevertheless, there is no statistically significant effect on the same institutional variablesin developed countries. By some measures, the income-gap between the rich and poor countries has worsened in the post-1950 period, and a consensus has emerged that poor institutions are to be blamed. A policy of encouraging FDI islikely to have the additional effect of improving institutions in developing countries and may have a greater potential to reduce income gaps than has been realized.

Author(s): Caggiano, Giovanni; Calice, Pietro

Journal: World Bank Economic Review  

Abstract: The relationship between bank competition, firm access to finance, and economic growth is a much debated topic in the economic literature and in policy circles. This paper uses a panel of 23 manufacturing sectors over 2002–10 to investigate the impact of bank competition on industry growth in the Gulf Cooperation Council economies. The results show that greater competition allows financially dependent firms to grow faster. In addition, the results show that lower restrictions on banks’ permissible activities, better credit information, and greater institutional effectiveness mitigate the damaging impact of low competition. These results are robust to a variety of checks. The findings suggest that improving bank competition should be an important aspect of the financial sector development agenda in the Gulf Cooperation Council.

Author(s): Braun, Matias; Raddatz, Claudio

Journal: Financial Management 

Abstract: "This article provides evidence on the relation among financial constraints, competition, and the cyclicality of markups. Based on a long series of industry data from a large number of countries, we find that markups increase in conjunction with the business cycle in environments with higher short-term financial constraints (liquidity constraints) and more competition. The evidence also suggests that these two elements complement each other: the procyclicality of markups in firms facing both high competition and high liquidity constraints is higher than that explained by each determinant independently."

Author(s):  Al Samman, Hazem; Azmeh, Chadi 

Journal: INTERNATIONAL JOURNAL OF ECONOMICS AND FINANCIAL ISSUES

Abstract: This study investigates the influence of financial liberalization on economic growth in developing countries indirectly through their effect on financial development. It selects the size and activity of the financial system as indicators of financial development. The general agreement on trade and services (GATS) is a very useful option for developing countries to consolidate their financial sector reform to give foreign investors more certainty about financial investment opportunities in the economies of developing countries. This study chooses the level of commitments taking by developing countries in the GATS in banking sector as a measure of financial liberalization. The main objective is to examine the effect of developing countries financial liberalization commitments at the GATS on economic growth through their effect on the size and activity of the financial sector. According to the analysis conducted, the results show no real effect of the level of commitments taking by developing countries in the GATS on economic growth through their effect on the size and activity of financial development. Even though the effect of financial development on economic growth is positive, the effect of financial liberalization through the GATS on financial development is almost zero.

Author(s): Gennaioli, Nicola; Rossi, Stefano

Journal: Review of Financial Studies, Volume 26, Issue 3, Pages 602-634, March 2013

Abstract: In a financial contracting model, we study the optimal debt structure to resolve financial distress. We show that a debt structure where two distinct debt classes coexist-one class fully concentrated and with control rights upon default, the other dispersed and without control rights-removes the controlling creditor's liquidation bias when investor protection is strong. These results rationalize the use and the performance of floating charge financing, which refers to debt financing where the controlling creditor takes the entire business as collateral, in countries with strong investor protection. Our theory predicts that the efficiency of contractual resolutions of financial distress should increase with investor protection.