Courts efficiency and Credit

The degree of protection that legal institutions provide to creditors depends on the quality of law enforcement through courts. In this paper we empirically investigate the effect of courts efficiency on bank credit contractual terms and credit access for Italian small and mediumsize firms. Exploiting within-country variation in the duration of bankruptcy procedures in courts, we adopt a spatial regression discontinuity design that compares credit conditions that the same bank applies to firms located in municipalities on either side of courts jurisdiction borders. Consistently with economic theory we find that lengthy bankruptcy procedures determine higher interest rates on bank loans for firms and negatively affects credit availability. Shortening bankruptcy procedures by 2 and half years would reduce the interest rates on credit lines by about 13 basis points and on term loans of 5 basis points.