Contractual unreliability and exit rates in crises

We study the determinants of exit following economic shocks. The ability of firms to re-
finance after a shock depends on reliable contractual enforcement, especially for poorer, more leveraged firms. Lobbying by established producers may weaken effective investor protection in order to limit access to refinance for their competitors. This produces ineffcient default and exit, increasing margins for surviving producers. We provide evidence that exit rates after a shock are higher in more financially dependent sectors precisely in the countries with worse contractual enforcement. The result is robust to instrumenting contractual enforcement by legal and political factors, and is not driven by other agency costs or competition effects.