TY  - JOUR
AU  - Hale,Galina
AU  - Razin,Assaf
AU  - Tong,Hui
TI  - The Impact of Credit Protection on Stock Prices in the Presence of Credit Crunches
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15141
PY  - 2009
Y2  - July 2009
UR  - http://www.nber.org/papers/w15141
L1  - http://www.nber.org/papers/w15141.pdf
N1  - Author contact info:
Galina Hale
Economic Research
Federal Reserve Bank of San Francisco
101 Market St., MS 1130
San Francisco, CA 94105
Tel: 415-974-3131
Fax: 415-974-2168
E-Mail: Galina.B.Hale@sf.frb.org

Assaf Razin
Department of Economics
Cornell University
Uris 422
Ithaca, NY 14853
Tel: 607/255-9625
Fax: 607/255-2818
E-Mail: ar256@cornell.edu

Hui Tong
Research Department
IMF Washington DC
700 19th Street N.W.
Washington, DC 20431
E-Mail: htong@imf.org
AB  - Data show that better creditor protection is correlated across countries with lower average stock market volatility. Moreover, countries with better creditor protection seem to have suffered lower decline in their stock market indexes during the current financial crisis. To explain this regularity, we use a Tobin q model of investment and show that stronger creditor protection increases the expected level and lowers the variance of stock prices in the presence of credit crunches. There are two main channels through which creditor protection enhances the performance of the stock market: (1) The credit-constrained stock price increases with better protection of creditors; (2) The probability of a credit crunch leading to a binding credit constraint falls with strong protection of creditors. These mechanisms are consistent with the patterns observed in the cross-country data. We find that except for OECD countries with low creditor protection, stock market return is negative in the crisis years and positive in non-crisis years.
ER  -