Court Enforcement and Firm Productivity: Evidence from a Bankruptcy Reform in Brazil

Abstract

I exploit variation in the congestion of civil courts across Brazilian municipalities, together with a bankruptcy reform increasing secured creditors' protection, to estimate the effect of enforcement on firm access to finance, investment and size. I find that firms operating in municipalities with less congested courts experienced larger increase in the use of secured loans, as well as a larger increase in investment and value of output in the years following the reform. To establish the direction of causality I use an instrumental variable strategy and focus on differences in court congestion across otherwise similar neighboring municipalities located across judicial district borders within the same state. Together, the evidence suggests that differences in court enforcement affect the impact of financial reform in developing countries.