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on Law and Economics |
| By: | Acharya, Viral V; Subramanian, Krishnamurthy |
| Abstract: | Do legal institutions governing financial contracts affect the nature of real investments in the economy? We develop a simple model and provide evidence that the answer to this question is yes. We consider a levered firm's choice of investment between innovative and conservative technologies, on the one hand, and of financing between debt and equity, on the other. Bankruptcy code plays a central role in these choices by determining whether the firm is continued or liquidated in case of financial distress. When the code is creditor-friendly, excessive liquidations cause the firm to shy away from innovation. In contrast, by promoting continuation upon failure, a debtor-friendly code induces greater innovation. This effect remains robust when the firm attempts to sustain innovation by reducing its debt under creditor-friendly codes. Employing patents as a proxy for innovation, we find support for the real as well as the financial implications of the model: (1) In countries with weaker creditor rights, technologically innovative industries create disproportionately more patents and generate disproportionately more citations to these patents relative to other industries; (2) This difference of difference result is further confirmed by within-country analysis that exploits time-series changes in creditor rights, suggesting a causal effect of bankruptcy codes on innovation; (3) When creditor rights are stronger, innovative industries employ relatively less leverage compared to other industries; and (4) In countries with weaker creditor rights, technologically innovative industries grow disproportionately faster compared to other industries. Finally, while overall financial development fosters innovation, stronger creditor rights weaken this effect, especially for highly innovative industries. |
| Keywords: | creditor rights; entrepreneurship; financial development; growth; law and finance; R&D; technological change |
| JEL: | G3 K2 O3 O4 O5 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6307&r=law |
| By: | Timothy Guinnane; Ron Harris; Naomi R. Lamoreaux; Jean-Laurent Rosenthal |
| Abstract: | This article challenges the idea that the corporation is a globally superior form of business organization and that the Anglo-American common-law is more conducive to economic development than the code-based legal systems characteristic of continental Europe. Although the corporation had important advantages over the main alternative form of organization (partnerships), it also had disadvantages that limited its appeal to small- and medium-sized enterprises (SMEs). As a result, when businesses were provided with an intermediate choice, the private limited liability company (PLLC) that combined the advantages of legal personhood and joint stock with a flexible internal organizational structure, most chose not to organize as corporations. This article tracks the changes that occurred in the menu of business organizational forms in two common-law countries (the UK and the US) and two countries governed by legal codes (France and Germany) and presents data showing the rapidity with which firms in each country responded to enabling legislation for PLLCs. We show that the PLLC was introduced first and most easily in a code country (Germany) and last and with the most difficulty in a common-law country (the US). Late introduction was associated with prolonged use of the partnership form, suggesting that the disadvantages of corporations did indeed weigh heavily on SMEs. |
| JEL: | K2 K22 N40 N80 O57 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13109&r=law |
| By: | Benito Arruñada |
| Abstract: | Demand for law professionals in the conveyancing of property is decreasing because of market and institutional changes. On the market side, many transactions feature large, well-known parties and standardized transactions, which make professionals less effective or necessary for protecting the parties to private contracts. On the institutional side, public titling makes it possible to dispense with a broadening set of their former functions. Recording of deeds made professionals redundant as depositories of deeds and reduced demand for them to design title guarantees. Effective registration of rights increasingly substitutes professionals for detecting title conflicts with third parties and gathering their consent. Market changes undermine the information asymmetry rationale for regulating conveyancing, while institutional changes facilitate liberalizing not only conduct but also license regulations. These arguments are supported here by disentangling the logic of titling systems and presenting empirical evidence from the European and USA markets. |
| Keywords: | Lawyers, notaries, property rights, real estate, transaction costs |
| JEL: | K11 K12 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:upf:upfgen:1034&r=law |