Indirect Costs of Financial Distress and Bankruptcy Law: Evidence from Trade Credit and Sales

Review of Finance, Forthcoming

AFA 2014 Philadelphia Meetings Paper

EFA 2009 Bergen Meetings Paper

53 Pages Posted: 6 Mar 2008 Last revised: 18 Aug 2018

See all articles by Zacharias Sautner

Zacharias Sautner

Frankfurt School of Finance & Management gemeinnützige GmbH; European Corporate Governance Institute (ECGI)

Vladimir N. Vladimirov

University of Amsterdam Business School

Date Written: August 2, 2017

Abstract

We argue that stronger debt enforcement in bankruptcy can reduce indirect costs of financial distress: (i) by increasing the likelihood of restructuring outside bankruptcy and (ii) by improving the recovery rate of stakeholders, such as trade creditors, through explicit legal provisions. Consistent with these predictions, we find that when debt enforcement is stronger, financially distressed firms are less exposed to indirect distress costs in the form of reduced access to trade credit and forgone sales. We document these effects in a panel of firms from 40 countries with heterogeneous debt enforcement characteristics and in differences-in-differences tests exploiting several recent bankruptcy reforms.

Keywords: Bankruptcy Costs, Workouts, Bankruptcy Law, International Comparison

JEL Classification: G33, G38

Suggested Citation

Sautner, Zacharias and Vladimirov, Vladimir N., Indirect Costs of Financial Distress and Bankruptcy Law: Evidence from Trade Credit and Sales (August 2, 2017). Review of Finance, Forthcoming ; AFA 2014 Philadelphia Meetings Paper; EFA 2009 Bergen Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1101696 or http://dx.doi.org/10.2139/ssrn.1101696

Zacharias Sautner

Frankfurt School of Finance & Management gemeinnützige GmbH ( email )

Sonnemannstraße 9-11
Frankfurt am Main, 60314
Germany

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Vladimir N. Vladimirov (Contact Author)

University of Amsterdam Business School ( email )

Roetersstraat 18
Amsterdam, 1018WB
Netherlands

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