Creditor Rights and Banking Behavior: Evidence from Transition Economies (original) (raw)

SSRN Electronic Journal, 2000

Abstract

ABSTRACT This paper explores the link between legal protections of creditors' and banks' lending behavior in transition economies. We suggest that banks' lending behavior is determined by legal rules that affect a project's liquidation value and present empirical results consistent with this claim. We find that rules on secured lending and preferential treatment of secured creditors in bankruptcy are positively associated with banks' willingness to lend. By contrast, replacing incumbent management with court appointed receivers negatively affects banks' willingness to lend. We also find that foreign banks are more responsive to legal change than domestic banks. This finding is consistent with the notion that foreign banks are more dependent on formal legal protections than domestic institutions having greater access to relational lending and enforcement practices.

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