LEGAL SYSTEM AND TRADE CREDIT: EVIDENCE FROM INTERNATIONAL DATA

Abstract

Using a World Bank large-scale, firm-level dataset for 47,346 firms in 69 emerging economies for the period of 2002-2006, I empirically investigate the impact of the efficiency of a country's legal system on firms' provision of trade credit. I find a positive and significant effect. The result is robust to a set of conventional controls used in the literature and to alternative measures of trade credit and legal system, including a Property Rights Index from The Heritage Foundation. To solve for the potential endogeneity of legal system I utilise the two-step Generalized Method of Moments (GMM) method and stepwisely include seven control variables. The instrument used for the full sample is legal origin; whereas for the sub-sample of 33 ex-colonies, I alternatively use three instruments: the settler mortality rates of Europeans in colonies during 1600s to 1800s, the population density of the colonies in 1500 and urbanisation in 1500. Meanwhile, I find that legal system has a larger impact on trade credit for firms in more-developed countries or with overdraft facilities.