Neither a Borrower Nor a Lender Be! Loan Application and Credit Decision for Young European Firms
We investigate the impact of banks’ capability to recover a loan on firms’ propensity to apply for credit and on banks’ propensity to lend, looking at firms from eleven European countries. Our findings suggest that banks’ recovery rates negatively affect
- PDF / 290,150 Bytes
- 30 Pages / 419.528 x 595.276 pts Page_size
- 38 Downloads / 188 Views
troduction The default of the English Crown in 1340 drove out of business the Peruzzi family in 1343 and the Compagnia de’ Bardi in 1346: not only was the English Crown unable to repay its loans, but both the Peruzzi and Bardi families were unable to implement any strategy which would JEL G21
A. Moro (*) • J. Barbar Cranfield University, Bedford, UK e-mail: [email protected] D. Maresch Institute for Innovation Management, Johannes Kepler University Linz, Linz, Austria A. Ferrando Capital Markets/Financial Structure Division of the European Central Bank, European Central Bank, Frankfurt, Germany © The Author(s) 2017 S.P.S. Rossi (ed.), Access to Bank Credit and SME Financing, Palgrave Macmillan Studies in Banking and Financial Institutions, DOI 10.1007/978-3-319-41363-1_2
29
30
A. Moro et al.
have enabled them to sell English Crown assets and to recover at least part of their loans (Cipolla 1994, 2002). Actually, the history of finance is rich in examples where lenders were not properly protected by laws and the ways in which they are enforced. In general, the certainty of the law and the probability to recover a loan in case of default affects banks’ lending decisions and, as a consequence, firms’ access to credit. Banks, as delegated monitors (Diamond 1984), play a vital role in supporting the development of the economy by investing people’s savings in reliable firms and projects. The legal context that supports banks in dealing with delinquent customers is important in order to ensure that lenders are able to recover the loan in case of a borrower’s default. In countries with strong creditor protection and rigorous law enforcement, banks will find it easier to control borrower risk and recover the loan in the event of a default. Consequently, banks will be more willing to lend ex ante (La Porta et al. 1997), which reduces a firm’s risk of credit constraint. Likewise, a firm’s decision to file for a loan can be affected by the legal context (Demirguc-Kunt and Maksimovic 1999). If the likelihood of a firm to be able to renegotiate the terms of the loan in times of financial distress are low due to strong creditor rights, the demand for loans might decrease since firms are aware they will not be able to escape the repayment of the loan or negotiate better terms. Our research builds on previous works that examine the role of a country’s legal system on firms’ debt financing. Empirical evidence suggests that the level of creditor and property rights protection and the rigorousness of law enforcement affect debt ownership concentration (e.g., Esty and Megginson 2003) as well as the terms of the credit, such as size, maturity and interest rate of the loan agreement (Bae and Goyal 2009; Laeven and Majnoni 2005; Qian and Strahan 2007). Research also finds that longer trials increase the probability that credit is less available and that default rates are higher (Jappelli et al. 2005) and shows that the overall supply of credit in developing countries increases subsequent to changes in collateral laws and ba
Data Loading...
