Legal System and Trade Credit: Evidence from International Data

Abstract

Using a large-scale, firm-level dataset from 68 emerging economies for the period of 2002-2006 compiled by the World Bank, we find that legal system has a positive and significant impact on the provision of trade credit. The result is robust to a set of conventional controls used in the literature, to the control of the endogeneity issue and the measurement error problem, and to alternative measures of trade credit and legal system. Meanwhile, we find that legal system has a larger impact on trade credit for firms with overdraft facilities than for those without overdraft facilities, and that the impact of legal system on trade credit is significant in more-redeveloped countries but not in less-developed countries.