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Bankruptcy Codes and Innovation


Viral V. Acharya


New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance

Krishnamurthy Subramanian


Indian School of Business (ISB), Hyderabad

April 1, 2007

AFA 2008 New Orleans Meetings Paper

Abstract:     
We argue that when bankruptcy code is creditor-friendly, excessive liquidations
cause levered firms to shun innovation, whereas by promoting continuation upon failure,
a debtor-friendly code induces greater innovation. We provide empirical support for this
claim by employing patents as a proxy for innovation. Using time-series changes within a
country and cross-country variation in creditor rights, we confirm that a creditor-friendly
code leads to lower absolute level of innovation by firms as well as relatively lower innovation
by firms in technologically innovative industries. When creditor rights are stronger, technologically
innovative industries employ relatively less leverage and grow disproportionately slower.

Number of Pages in PDF File: 55

Keywords: Creditor rights, R&D, Technological change,Law and finance, Entrepreneurship, Growth, Financial development

JEL Classification: G3, K2, O3, O4, O5

working papers series





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Date posted: March 16, 2007 ; Last revised: October 25, 2014

Suggested Citation

Acharya, Viral V. and Subramanian, Krishnamurthy, Bankruptcy Codes and Innovation (April 1, 2007). AFA 2008 New Orleans Meetings Paper. Available at SSRN: http://ssrn.com/abstract=971566 or http://dx.doi.org/10.2139/ssrn.971566

Contact Information

Viral V. Acharya (Contact Author)
New York University - Leonard N. Stern School of Business ( email )
44 West 4th Street
New York, NY NY 10012
United States
HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
New York University (NYU) - Department of Finance
Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
Krishnamurthy Subramanian
Indian School of Business (ISB), Hyderabad ( email )
Hyderabad, Gachibowli 500 019
India

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