Does Legal Enforcement Matter for Financial Risks? The Case of Strategic Default in China∗
نویسندگان
چکیده
Using a unique sample of Chinese bank loans over the period 2007-2012, we analyze the repayment decisions of borrowing firms whose cash holdings are high enough to cover the maturing loans. We find that at the firm level weak legal enforcement increases the likelihood for these firms to default on its loan obligations. The impact of legal enforcement becomes stronger when firms face tighter financing constraints, or when credit supply becomes more scarce. Our results highlight the role of legal enforcement in determining financial risks and show that market imperfection strengthens the impact of legal enforcement on financial risks. JEL classification: D22, G32, K22.
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