The Brazilian Bankruptcy Law Experiment

Abstract

In early 2005 a new bankruptcy law was approved by the Brazilian Congress, taking effect a few months later. The new legislation improved creditor protection and the bankruptcy system’s efficiency. This paper tries to shed some light on the empirical consequences of a bankruptcy reform on a poorly developed credit market. Using data from Brazilian and non-Brazilian firms, we estimated, using three alternative models, the effect of the bankruptcy reform on contractual and non-contractual debt variables. In general, all the models yielded similar results. Concerning contractual debt variables, we found a significant increase in the total amount and in long-term debt and a reduction in the cost of debt. For noncontractual debt variables, we found a reduction in the bank debt to public debt ratio, an increase in the number of domestic loan contracts and no impact on the number of foreign loan contracts.

Keywords: Financing Policy, Bankruptcy, Law

JEL Classification: G32, G33, K2