Can Bankruptcy Laws Mitigate Business Cycles? Evidence from Creditor Rights, Debt Financing, and Investment
City University of Hong Kong (CityUHK) - Department of Economics & Finance
University of Alberta - Department of Finance and Statistical Analysis
John K. Wald
University of Texas at San Antonio
June 10, 2014
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
Date posted: August 30, 2012 ; Last revised: July 14, 2014
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