Judicial Institutions and Firms' External Finance: Evidence from Russia

Abstract

This study presents microeconomic evidence on the relationship between the quality of judiciary and lending. We analyze loans to 11,000 Russian firms between 1996 and 2002 and ask whether the creditor's willingness to lend to a firm is affected by the quality of courts that protect the creditor's rights. We match each firm to the regional commercial court where the creditor would have to sue the firm if it defaulted. We use the share of the court's decisions that get appealed as an (inverse) proxy for court quality. First, we find that creditors make fewer loans when their rights are protected by courts with higher appeal rates. Second, banks respond more to court quality than other creditors (such as suppliers). Furthermore, firms that are younger and not owned by their creditors suffer more from poor courts. These latter findings suggest that creditors use reputation concerns and ownership as substitutes for courts in contract enforcement. The Author 2012. Published by Oxford University Press on behalf of Yale University. All rights reserved. For Permissions, please email: journals.permissions@oup.com, Oxford University Press.