Judicial Efficiency and Bank Credit to Firms

Abstract

This paper analyses empirically the effect of judicial efficiency on bank credit contractual terms for the universe of Italian corporations borrowing from the banking sector. Exploiting within-country variation in the length of bankruptcy proceedings across different jurisdictions, the paper uses a spatial regression discontinuity design that compares credit conditions applied to firms located in municipalities on different sides of jurisdiction borders, controlling for bank characteristics. The results show that judicial efficiency is associated with a reduction in the cost of credit as well as with an increase in its availability for firms, in particular for those at high risk of default. Judicial efficiency increases leverage and investment for high risk firms. All these results suggest that the banking system tilts credit conditions in favor of safe firms as court inefficiency increases. Finally, court efficiency is also associated with a reduction in both the stock and the flow of Non Performing Loans.