Finance and Development

Paper Session

Sunday, Jan. 8, 2017 1:00 PM – 3:00 PM

Sheraton Grand Chicago, Chicago Ballroom IX
Hosted By: American Finance Association
  • Chair: Paola Sapienza, Northwestern University

When Do Laws and Institutions Affect Recovery Rates on Collateral?

Hans Degryse
,
University of Leuven
Vasso Ioannidou
,
Lancaster University
Jose Liberti
,
Northwestern University and DePaul University
Jason Sturgess
,
DePaul University

Abstract

We show that law and institutions that grant creditors stronger enforcement rights and bargaining power upon default increase expected collateral recovery rates by studying ex-ante appraised liquidation values on secured loans made by a single bank across 16 countries. Using within-borrower estimation, movable collateral, which is less redeployable, susceptible to agency problems, and faster to depreciate, exhibits lower recovery rates that are more vulnerable to enforcement. Further, the bank compensates for lower recovery rates through higher interest rates. The results highlight one of the economic channels through which law affects financial development and can explain cross-country variation in capital structure.

Do Criminal Politicians Affect Firm Investment and Value? Evidence From a Regression Discontinuity Approach

Vikram Nanda
,
University of Texas-Dallas
Ankur Pareek
,
Rutgers University

Abstract

Using unique datasets on the criminal background of Indian politicians and details on investment projects by Indian firms, we provide comprehensive evidence on the effects of criminal/corrupt politicians on firm value and investments. We use a regression discontinuity approach and focus on close elections to establish a causal link between the election of criminal politicians and firms’ value and investment decisions. The election of criminal politicians leads to lower election-period and project-announcement stock-market returns for private-sector firms based in the district. There is a sharp decline in the total investment by private sector firms in criminal-politician districts. Interestingly, criminal-politicians appear to offset the decline in private-sector investment by a roughly equivalent increase in investment by state-owned firms. Corrupt politicians are less destructive of value when their party is in power and when they occupy ministerial positions.

Creditor Rights and Relationship Banking: Evidence From a Policy Experiment

Nagpurnanand Prabhala
,
University of Maryland
Prasanna Tantri
,
Indian School of Business
Gursharan Bhue
,
University of Chicago

Abstract

We examine the relation between creditor rights and relationship lending, exploiting the variation in creditor rights induced by legal changes. In 2002, a new law in India expanded creditors’ rights by letting secured lenders seize collateral of defaulters without recourse to India’s clogged court system. We show that measures of relationship lending decline after creditor rights increase. The effects are more pronounced for banks with greater informational advantage, small firms and firms that do not belong to established business groups, and in regions with low bank competition. We conduct placebo tests for internal validation of the results and externally validate the results using an earlier change in creditor rights that has staggered implementation across states. We conclude that creditor rights shape not only the amount but also the type of credit in an economy
Discussant(s)
Stefano Rossi
,
Purdue University
Mara Faccio
,
Purdue University
Carola Schenone
,
University of Virginia
JEL Classifications
  • G3 - Corporate Finance and Governance