Institutional environment and bank loans: Evidence from 25 developing countries

Abstract

Manuscript Type: Empirical Research Question/Issue: This study tries to verify the impact of institutional environment, namely legal protection, law enforcement, trust and religion, on bank loans in the context of developing countries. In addition, we investigate the interactive effect of formal and informal institutions. Research Findings/Insights: Using survey data on enterprises from 25 developing countries, we find that institutional environment can significantly affect bank loans in developing countries. Compared with formal institutions, informal ones are relatively efficient at alleviating enterprises’ financial constraints, while law enforcement is more important than legal protection within the set of formal institutions. The split‐sample tests indicate that informal and formal institutions have substitutive effects on firms’ loan financing. Theoretical/Academic Implications: This study provides evidence of the impact of institutions on loan contracts in developing countries and sheds light on the importance of law enforcement and informal institutions. It suggests new avenues of research on the loan contract from a neo‐institutional perspective. Practitioner/Policy Implications: This study offers inspiration to the governments of developing countries interested in promoting enterprise development. In addition, it provides efficient methods that entrepreneurs can use to reduce the financing constraints on enterprises in the context of lower legal protection.

The impact of religiosity on earnings quality: International evidence from the banking sector

“…Column 3 in Table 4 indicates that the coefficient of the interaction term RELIG×LOW_LEGAL_PROT is positive and significant ( p -value ≤ 0.01), suggesting that the impact of religiosity on banks’ earnings quality is more prominent in countries with lax legal protection. Therefore, our evidence confirms the notion that informal institutions have larger effects in regions where formal institutions are less effective ( Guiso et al, 2004 ; North, 1994 ; Qian et al, 2018 ), and thus we accept H 2B .…”

“…In this section, we assess whether the effect of religiosity strengthens with weak country formal institutions ( H 2B ). We use the legal rights index from the Doing Business Project for 189 economies, similar to Qian et al (2018) , to capture the strength of a country’s legal protection. 10 Using the sample median of legal protection, we create an indicator variable ( LOW_LEGAL_PROT ) that equals one if the country’s legal protection index is lower than the sample median, and zero otherwise.…”

“…In addition, North (1994) notes that informal institutions act as a complement to conventional formal institutions, especially when the latter become less effective. Empirical investigations are supportive of this notion and demonstrate that informal institutions play an important role in countries with weak formal institutions, such as legal protection and law enforcement (see for example, Ang, Cheng, & Wu, 2015 ; Guiso, Sapienza, & Zingales, 2004 ; Qian, Cao, & Cao, 2018 ). For instance, empirical evidence from Italy ( Guiso et al, 2004 ) and China ( Ang et al, 2015 ) indicates that religion impacts on decision-making frameworks, although the level of such an impact varies depending on the strength of the countries’ formal institutions.…”

Blue-Collar Crime and Finance

“…Qi et al (2011Qi et al ( , 2017 and Qian and Strahan (2007) show that creditor rights enhance the size and quality of debt markets. Qian et al (2017) confirm that legal institutions are particularly important in developing countries. Part of this literature emphasizes the role of enforcement (La Porta et al, 1998) and expenditures on enforcement (Jackson and Roe, 2009), which includes but is not limited to market surveillance technology (Comerton-Forde and Rydge, 2006;Cumming and Johan, 2008;Cumming, Johan, and Li, 2011).…”

Blue-Collar Crime and Finance

“…Qi et al (2011Qi et al ( , 2017 and Qian and Strahan (2007) show that creditor rights enhance the size and quality of debt markets. Qian et al (2017) confirm that legal institutions are particularly important in developing countries. Part of this literature emphasizes the role of enforcement (La Porta et al, 1998) and expenditures on enforcement (Jackson and Roe, 2009), which includes but is not limited to market surveillance technology (Comerton-Forde and Rydge, 2006;Cumming and Johan, 2008;Cumming, Johan, and Li, 2011).…”