Creditor Rights, Agency Costs, and Business Cycles
City University of Hong Kong (CityUHK) - Department of Economics & Finance; Concordia University
University of Alberta - Department of Finance and Statistical Analysis
John K. Wald
University of Texas at San Antonio
November 29, 2012
Midwest Finance Association 2013 Annual Meeting Paper
Using a sample of firms from 40 countries, we consider how differences in country-level creditor rights impact firm-level investment and financing over the business cycle. We find that greater creditor rights are associated with greater firm investment and more debt financing during recessions. In contrast, greater creditor rights have no effect on firm investment or debt financing during expansions. Further, we find that these effects are stronger for firms that are more likely to have severe agency problems. Overall, the results suggest that creditor protection laws help mitigate increased agency costs during recessions and may play an important role in economic recoveries. The results are consistent with Bernanke and Gertler (1989) who show that agency costs can exacerbate business cycles.
Number of Pages in PDF File: 49
Keywords: business cycles, agency costs, creditor rights, investment, debt financing
JEL Classification: E02, E32, F44, G31, G32working papers series
Date posted: August 30, 2012 ; Last revised: February 21, 2013
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