The Quality of the Legal System, Firm Ownership, and Firm Size

By Luc Laeven, Christopher Woodruff. Review of Economics and Statistics, 2004

289 citations recorded by the source corpus.

We show that firm size is increasing with the quality of the legal system in Mexico. A 1-standard-deviation improvement in the quality of the legal system is associated with a 0.150.30 standard deviation increase in firm size. We also show that the legal system affects firm size by reducing the idiosyncratic risk faced by firm owners. The legal system has a smaller impact on partnerships and corporations than on proprietorships, where risk is concentrated in a single owner. All of the findings are robust to instrumenting for legal quality using historical conditions. By focusing on firms in a single country, the data draw attention to the importance of informal institutions.

Subfields: Accounting, Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/2b3d8b9bf0c430d231dedefbeae0c1a25252c54d

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Citations in the corpus

How Well do Institutional Theories Explain Firms' Perceptions of Property Rights? (2005, background): “In a study focused on Mexico, Laeven and Woodruff (2004) find that states with more effective legal institutions have larger firms.”
Enlarging the Contracting Space: Collateral Menus, Access to Credit, and Economic Activity (2016, unknown): “Lilienfeld-Toal et al. (2012) and Vig (2013) look at reforms in India that empowered creditors in seizing assets of defaulting firms.”
Releasing Constraints to Growth or Pushing on a String? Policies and Performance of Mexican Micro-Firms (2009, background): “The literature on credit constraints (for recent examples see Banerjee and Duflo, 2004; Ayyagari et al., 2006; Laeven and Woodruff, 2007) is clearly relevant here, although we are casting the net far more widely.”
Productivity growth in Italy: a tale of a slow-motion change (2018, unknown): “First, the empirical literature generally finds a positive relationship between judicial efficiency and firm size, suggesting that protection of contractual relationships allows entrepreneurs to operate closer to their optimal scales (Kumar et al., 2001; Laeven and Woodruff, 2007)46.”
A Darker Side to Decentralized Banks: Market Power and Credit Rationing in SME Lending (2012, unknown): “State fixed effects capture systematic differences in the lending environment across states (such as bankruptcy laws) that may affect loan sizes (Laeven and Woodruff, 2007).”
Remittances and Development: Lessons from Latin America (2008, result): “These results are broadly supported by a vast empirical literature on endogenous growth, including Barro (1991) on the role of education, trade, and government burden, among other variables; Dollar (1992) on trade openness; Canning, Fay, and Perotti (1994) on public infrastructure; and Beck, Levine,”
Corruption in bank lending to firms : cross-country micro evidence on the beneficial role of competition and information sharing (2009, background): “In fact, this is a regular finding in the finance and growth literature (e.g., Beck, 2002; Laeven and Levine, 2007; Laeven and Woodruff, 2007).”