The Value of Corporate Governance for Bank Finance in an Emerging Economy: Evidence from a Natural Experiment

Abstract

This article uses a company law reform in Morocco as a natural experiment to study the value of corporate governance for bank credit. In 2001, Morocco replaced a company law from 19th-century France with modern standards of corporate accountability; this reform was very similar to reforms implemented in many developing countries at about the same time. I evaluate the impact of that reform upon manufacturing firms’ access to bank credit, using panel data to test the effect upon bank overdraft provision of a firm’s legal obligations (i.e., the firm’s choice of the more onerous SA status rather than the less onerous SARL). I find that the reform induced many SA firms to switch to SARL, and that—relative to firms remaining in the SA status—this caused a significant and substantial withdrawal of overdraft facilities. I show that this result is robust to firm’s fixed effects and to the choice of explanatory variables, and I consider heterogeneous effects across different firms. I conclude that the reform may have been counterproductive in several important respects. (JEL O12, K22, G21)