Creditor rights and the corporate bond market

• We study the impact of investor protection on capital market development.
• Creditor rights determine corporate bond market development.
• Shareholder protection only partially influences equity market development.
• Financial reforms on capital markets are dependent on investor protections.

This study examines whether investor protection affects capital markets, specifically the development of corporate bond markets versus equity markets. Using a dataset of 42 countries, we show that countries with strong creditor rights have more developed corporate bond markets than equity markets. However, we find only weak evidence that countries with stronger shareholder protection have more developed equity markets than corporate bond markets. Additionally, we find that the effect of financial reforms on capital markets is strongly dependent on the strength of investor protection and on the associated information disclosure in a given country.