Finance and Development
Sunday, Jan. 7, 2018 8:00 AM - 10:00 AM
- Chair: Emily Breza, Harvard University
Creditor Rights, Threat of Liquidation, and Labor-Capital Choice of Firms
AbstractWe study how firms respond to a strengthening of creditor rights by focusing on their choice of inputs of production. Following a legal reform that allowed secured creditors in India to circumvent the lengthy and inefficient judicial process by giving them the power to directly seize and liquidate the defaulter's assets, we find that there was an increase in the number of workers employed, but a reduction in investment in fixed capital and plant and machinery. The results suggest that firms preemptively substitute capital with labor in their production process in response to stronger creditor rights. These results are consistent with stronger creditor rights leading to a higher threat of liquidation for firms, that subsequently substitute secured formal credit for trade credit. We also find that the legal reform had a disciplining influence on firms, and treated firms became more productive and profitable in the short-term following the law change. We find support for our main results across different labor regimes, regions with differing pre-policy court efficiency, as well as across industries with different elasticities of substitution between capital and labor.
Liquidity Requirements and Bank Deposits: Evidence from Ethiopia
AbstractLiquidity requirements can stimulate deposit growth by increasing depositor repayment in bad states. A stylized model shows that such deposit growth may exceed the intermediation margin decline in the presence of high credit risk, hence stimulate lending and branching. Our empirical test exploits a large and unexpected policy change, which fostered the liquid assets of Ethiopian banks by 33% in one quarter of 2011. A representative panel of bank depositors shows deposit growth among wealthy and highly educated individuals. Bank balance-sheets and two sources of bank exposure to the policy highlight an increase in deposits, loans and branches.
- G3 - Corporate Finance and Governance