Subnational Legal Property and Judicial System Efficiency and Firm-level Access to Finance: Evidence from Africa

Abstract: Law and finance theory has been one of the most influential theories in institutional economics in recent times and links legal rules and regulations to financial outcomes. This paper tests this theory in nascent institutional contexts such as those in Africa by taking advantage of a panel dataset of Nigerian firms that combines data from subnational measures of the efficiency of the legal property and judicial system from the World Bank Doing Business Report and firm-level access to finance data from the World Bank Enterprise surveys. We investigated the effects of changes (reforms) to subnational institutional variables on firm-level access to finance. Based on firm fixed effects panel analysis of a sample of Nigerian firms that exploits changes in the subnational institutional variables between the years 2007 and 2014, we find that two statistically significant measures of the efficiency of the legal property system went contrary to the predictions of the law and finance theory, while the only statistically significant measure of the judicial system efficiency gave mixed findings for the law and finance theory. We discuss theoretical and policy implications of our findings. JEL codes: G20, K20, O55 Keywords: law and finance theory; legal property system efficiency; judicial system efficiency; access to finance; Africa; Nigeria