Courts, firms and allocation of credit

Economics

Speaker:Julia Shvets, University of Cambridge
Date: Friday 3 March 2006
Time: 16:15
Location: Lecture Room D, Streatham Court

Further details

The paper investigates empirically whether and how performance of courts affects firms’ external finances, using Russiaas an example. Taking advantage of variation in quality of regional commercial courts, it traces its impact on lending to firms located in different regions of Russiaduring the period from 1995 to 2002. The results show that more reliable courts lead to higher bank lending to firms. This occurs predominantly through expansion of the number of businesses which have access to bank financing. There is some evidence that trade credit also responds to changes in quality of courts. However, credit from suppliers is considerably less sensitive to court performance than bank credit

Court reliability is measured using appeal rates of lower court decisions to higher courts. The paper analytically derives the relationship between reliability of courts, appeal rates and lending to firms, proposing a specific channel through which law enforcement affects external finance.