Does (average) size matter? Court enforcement, business demography and firm growth
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Previous literature finds that the quality of judicial enforcement has a positive impact on average firm size, but it has not disentangled its effect on the growth of incumbent firms from that on business demography. This distinction is crucial, as entrants are generally smaller than incumbents, but both high entry rates and high firm growth are associated with better economic performance. This paper fills this gap, finding that judicial efficacy fosters the growth of incumbents and promotes entry in Spain. The paper also shows for the first time that the specific type of judicial procedure that companies face in case of a conflict, rather than the overall functioning of courts, is the relevant matter. Specifically, judicial efficacy at the declaratory stage (when a debt is verified by a judge) has a positive impact on both firm growth and entry, while it has no impact at the execution stage (when the judge requires its payment).
KeywordsEnforcement institutions Judicial efficacy Firm size Firm growth Business demography
JEL ClassificationsD23 K41 K12 L11 L25 L26 O12 R12
We are grateful to Patricia Festa, Ildefonso Villán Criado, Fernando Gómez, María Gutiérrez, Juan Francisco Jimeno, Enrique Moral, Carlos Thomas and especially the editor and two anonymous referees for their useful comments and suggestions. We especially appreciate the work of Claire McHugh, who reviewed the manuscript in depth. We also wish to thank seminar participants, referees and discussants at two seminars of the Banco de España-Eurosystem, the III Annual Conference of the Spanish Association of Law and Economics (AEDE), the 2012 Annual Conference of the European Association of Law and Economics (EALE) and the 8th Annual Conference of the Italian Society of Law and Economics (SIDE-ISLE). We are also indebted to Marcos Marchetti, Paula Sánchez Pastor and Ángel Luis Gómez Jiménez for their assistance in the preparation of some of the variables and figures. The views expressed are those of the authors and should not be attributed to the Banco de España.
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