Law and Finance Matter: Lessons from Externally Imposed Courts

Date
2016-05-13
Authors
Brown, James
Cookson, J. Anthony
Brown, James
Heimer, Rawley
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Finance
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Finance
Abstract

This paper provides novel evidence on the real and financial market effects of legal institutions. Our analysis exploits persistent and externally imposed differences in court enforcement that arose when the U.S. Congress assigned state courts to adjudicate contracts on a subset of Native American reservations. Using area-specific data on small business lending, we find that reservations assigned to state courts, which enforce contracts more predictably than tribal courts, have stronger credit markets. Moreover, the law-driven component of credit market development is associated with significantly higher per capita income, with stronger effects in sectors that depend more on external financing.

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This is a pre-copyedited, author-produced version of an article accepted for publication in The Review of Financial Studies, following peer review. The version of record Law and Finance Matter: Lessons from Externally Imposed Courts James R. Brown J. Anthony Cookson Rawley Z. Heimer; Volume 30, Issue 3, 1 March 2017, Pages 1019–1051. is available online at: DOI: 10.1093/rfs/hhw030. Posted with permission.

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