We examine the relationship between creditor protection, law reform and credit expansion using longitudinal data for four OECD countries between 1970 and 2005. By decomposing the different elements of creditor protection, we show that civil law countries (France and Germany) have developed a high level of protection for creditors in the form of controls over the management of debtor firms, while common law countries (UK and USA) have arrived at a high degree of protection in relation to secured creditors' contractual rights over firms' assets. Using panel causality tests and dynamic panel data modelling, we show that laws strengthening creditors' control over debtor firms in these four countries had a long-term positive effect on the expansion of private credit, while reforms increasing secured creditors' rights had a negative effect. We explore the implications of our findings for legal origin theory and the varieties of capitalism approach.
- economic reform
- financial markets
- institutional complementarity