The Causal Effect of Bankruptcy Law on the Cost of Finance

49 Pages Posted: 15 Mar 2012

See all articles by Nicolas Andre Benigno Serrano-Velarde

Nicolas Andre Benigno Serrano-Velarde

Bocconi University

Giacomo Rodano

Bank of Italy

Emanuele Tarantino

University of Mannheim - Department of Economics; Tilburg Law and Economics Center (TILEC)

Date Written: March 14, 2012

Abstract

We exploit the staggered nature of the Italian bankruptcy law reform of 2005-2006 to disentangle the distinct causal impact of both reorganization and liquidation procedures in bankruptcy on firms' cost of loan financing. Using a unique loan-level dataset covering the universe of firm funding contracts we present two major findings: first, that the introduction of a reorganization procedure increased the interest rates on loan financing; second, that the reform that accelerated the liquidation procedure not only decreased firms' cost of finance but also relaxed credit constraints.

Keywords: Default, Renegotiation, Bankruptcy Code

JEL Classification: G21, G30, G33

Suggested Citation

Serrano-Velarde, Nicolas Andre Benigno and Rodano, Giacomo and Tarantino, Emanuele, The Causal Effect of Bankruptcy Law on the Cost of Finance (March 14, 2012). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=2021759 or http://dx.doi.org/10.2139/ssrn.2021759

Giacomo Rodano

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Emanuele Tarantino

University of Mannheim - Department of Economics ( email )

D-68131 Mannheim
Germany

Tilburg Law and Economics Center (TILEC) ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

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