Law and Firms' Access to Finance

By Thorsten Beck, Asli Demirgüç-Kunt, Ross Levine. 2004

215 citations recorded by the source corpus.

Why does a country's legal origin influence its firms' access to finance? Using data from over 4,000 firms in 38 countries, the authors show that firms in countries with French legal origin face significantly higher obstacles in accessing external finance than firms in common law countries. Next, their results indicate that French legal origin countries tend to have (1) less adaptable legal systems, as defined by the degree to which case law and principles of equity rather than simply statutory law are accepted foundations of legal decisions, and (2) less politically independent judiciaries, as defined by the degree of tenure of supreme court judges and their jurisdiction over cases involving the government. Finally, the authors find that the adaptability of a country's legal system is more important for explaining the obstacles that firms face in contracting for external finance than the political independence of the judiciary. So, they distinguish among competing explanations of why law matters for financial development by empirically documenting the links running from international differences in legal origin to the operation of the financial system at the firm level.

Subfields: Accounting, Finance, Sociology and Political Science

View Paper: https://www.semanticscholar.org/paper/ad33bf2a89cbe4a9f77328576451fa162896e273

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Citations in the corpus

When Do Creditor Rights Work (2007, unknown): “Within this field of inquiry into legal systems and finance, several cross-country studies (LLSV 1997; Beck et al. 2004; Qian and Strahan 2005) have shown that besides laws on the books, judicial enforcement is also related to financial outcomes.”
The Role of Firm-Specific Incentives and Country Factors in Explaining Voluntary IAS Adoptions: Evidence from Private Firms (2008, background): “(2005a) argue that larger firms are more likely to depend on long-term financing and therefore large firms are more likely to voluntarily adopt better governance structures (such as IAS) to facilitate external financing.”
Small and medium-size enterprises: Access to finance as a growth constraint (2006, methodology): “Using the WBES, Beck et al. (2005c) show that the effect of growth obstacles on firm growth is smaller in countries with better-developed financial and legal systems.”