Date Added: Feb 2010
Financial frictions have been documented to be an important factor behind the evolution of firms across the world. Within the theoretical strand of the literature, enforcement and information problems are now standard ways to rationalize the presence of such frictions. On the other hand, recently compiled cross-country indexes of legal and institutional development (e.g. Djankov, et al., 2006) have shed light on the particular legal areas that firms find most obstructive to their growth plans. This paper focuses on a particular legal feature, the procedures followed after liquidation, to disentangle the effects that weak or inefficient procedures could have on the ability of firms to finance their operations, to grow and to recover from shocks.