Cross-Country Variations in Capital Structures: The Role of Bankruptcy Codes
43 Pages Posted: 29 Nov 2009 Last revised: 27 Jan 2010
Date Written: December 1, 2008
We investigate the impact of bankruptcy codes on ﬁrms’ capital-structure choices. We develop a theoretical model to identify how ﬁrm characteristics may interact with the bankruptcy code in determining optimal capital structures. A novel and sharp empirical implication emerges from this model: that the difference in leverage choices under a relatively equity-friendly bankruptcy code (such as the US’s) and one that is relatively more debt-friendly (such as the UK’s) should be a decreasing function of the anticipated liquidation value of the ﬁrm’s assets. Using a large database of ﬁrms from the US and the UK over the period 1990 to 2002, we subject this prediction to extensive empirical testing, both parametric and non-parametric, using different proxies for liquidation values and different measures of leverage. We ﬁnd strong support for the theory; that is, we ﬁnd that our proxies for liquidation value are both statistically and economically signiﬁcant in explaining leverage differences across the two countries. On the other hand, many of the other factors that are known to affect within-country leverage (e.g., size) cannot explain across-countries differences in leverage.
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