Institutional Failure or Market Failure?

40 Pages Posted: 9 Jan 2018

See all articles by Ike Mathur

Ike Mathur

Southern Illinois University - Department of Finance

Isaac Marcelin

University of Maryland Eastern Shore

Date Written: December 23, 2014

Abstract

We investigate the effect of the power of creditors, property rights protection, and institutional quality, on bank profits using a panel of 498 banks from 46 countries. Results show that better institutions and stronger property rights protection reduce bank profits, while stronger power of creditors drives up bank profits significantly. Results imply that better institutions and enhanced property rights protection lead to greater flow of credit allowing firms and investors to undertake more profitable ventures. By extension, stronger creditor rights erect steeper barriers to external finance for firms and investors. National indicators of economic freedoms may be more important to lowering the spread than strict creditor rights. Seemingly, credit markets fail when economic institutions fail or when governments intervene into these markets in ways that impede the safety and soundness of financial transactions and private contracting.

Keywords: Institutions, Property rights, Law and finance, Power of creditors, Bank spreads, Bank profits

JEL Classification: D23, G20, G21, G28, G32, K42

Suggested Citation

Mathur, Ike and Marcelin, Isaac, Institutional Failure or Market Failure? (December 23, 2014). Journal of Banking and Finance, Volume 52, March 2015, Pages 266-280, Available at SSRN: https://ssrn.com/abstract=3095070

Ike Mathur

Southern Illinois University - Department of Finance ( email )

Mailcode 4626
Carbondale, IL 62901-4626
United States
618-453-1421 (Phone)
618-453-5626 (Fax)

Isaac Marcelin (Contact Author)

University of Maryland Eastern Shore ( email )

11868 Academic Oval
Princess Anne, MD 21853
United States

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