Creditor Protection Laws, Debt Financing, and Corporate Investment over the Business Cycle
45 Pages Posted: 30 Aug 2012 Last revised: 18 Aug 2016
Date Written: June 12, 2016
We examine how legal creditor rights are related to debt financing and corporate investment over the business cycle. Using firm-level data from 40 countries, we find that creditor rights are associated with greater debt financing and investment during economic downturns, but creditor rights have a significantly smaller effect during expansions. The beneficial effects of creditor rights during recessions are stronger for firms that are more likely to have severe shareholder-bondholder agency problems. We also find that during recessions (relative to expansions) strong creditor rights are associated with a smaller decline in net capital flows. Our findings are consistent with credit market frictions increasing during recessions, and with stronger creditor rights decreasing the negative effects of these frictions. Overall, the results suggest that better creditor protection laws help moderate the decline in debt financing and investment during recessions.
Keywords: Business Cycles, Creditor Rights, Agency Costs, Debt Financing, Investment
JEL Classification: E02, E32, F44, G31, G32
Suggested Citation: Suggested Citation