Abstract

http://ssrn.com/abstract=2138242
 


 



Can Bankruptcy Laws Mitigate Business Cycles? Evidence from Creditor Rights, Debt Financing, and Investment


Yaxuan Qi


City University of Hong Kong (CityUHK) - Department of Economics & Finance

Lukas Roth


University of Alberta - Department of Finance and Statistical Analysis

John K. Wald


University of Texas at San Antonio

June 10, 2014


Abstract:     
We examine how legal creditor rights are related to debt financing and corporate investment over the business cycle. Using firm-level data from 40 countries, we find that creditor rights are associated with greater debt financing and investment during economic downturns, but creditor rights have a significantly smaller effect during expansions. We also find that the negative relation between creditor rights and the cost of debt is concentrated during recessions. The beneficial effects of creditor rights are stronger for firms that are more likely to have severe shareholder-bondholder agency problems. Overall, the results suggest that better creditor protection laws help moderate the decline in investment and debt financing during recessions and potentially help smooth business cycles.

Number of Pages in PDF File: 48

Keywords: Business Cycles, Creditor Rights, Agency Costs, Debt Financing, Cost of Debt, Investment

JEL Classification: E02, E32, F44, G31, G32

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Date posted: August 30, 2012 ; Last revised: July 14, 2014

Suggested Citation

Qi, Yaxuan and Roth, Lukas and Wald, John K., Can Bankruptcy Laws Mitigate Business Cycles? Evidence from Creditor Rights, Debt Financing, and Investment (June 10, 2014). Available at SSRN: http://ssrn.com/abstract=2138242 or http://dx.doi.org/10.2139/ssrn.2138242

Contact Information

Yaxuan Qi
City University of Hong Kong (CityUHK) - Department of Economics & Finance ( email )
83 Tat Chee Avenue
Kowloon
Hong Kong
Lukas Roth
University of Alberta - Department of Finance and Statistical Analysis ( email )
2-32C Business Building
Edmonton, Alberta T6G 2R6
Canada
780-492-4431 (Phone)
780-492-3325 (Fax)

John K. Wald (Contact Author)
University of Texas at San Antonio ( email )
1 UTSA Circle
San Antonio, TX 78249
United States
210-458-6324 (Phone)
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