Creditor Rights and Corporate Risk-Taking
42 Pages Posted: 9 Mar 2009 Last revised: 10 Jun 2011
Date Written: May 25, 2011
We propose that stronger creditor rights in bankruptcy affect corporate investment choice by reducing corporate risk-taking. In cross-country analysis, we find that stronger creditor rights induce greater propensity of firms to engage in diversifying acquisitions that are value-reducing, to acquire targets whose assets have high recovery value in default, and to lower cash-flow risk. Also, corporate leverage declines when creditor rights are stronger. These relations are usually strongest in countries where management is dismissed in reorganization and are also observed over time following changes in creditor rights. Our results thus identify a potentially adverse consequence of strong creditor rights.
Keywords: creditor rights, investment policy, bankrutcy code
JEL Classification: G30, G31, G33
Suggested Citation: Suggested Citation