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Creditor Protection Laws, Debt Financing, and Corporate Investment over the Business Cycle

45 Pages Posted: 30 Aug 2012 Last revised: 18 Aug 2016

Yaxuan Qi

City University of Hong Kong (CityUHK) - Department of Economics & Finance

Lukas Roth

University of Alberta - Department of Finance and Statistical Analysis

John K. Wald

University of Texas at San Antonio

Date Written: June 12, 2016

Abstract

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

Qi, Yaxuan and Roth, Lukas and Wald, John K., Creditor Protection Laws, Debt Financing, and Corporate Investment over the Business Cycle (June 12, 2016). Available at SSRN: https://ssrn.com/abstract=2138242 or http://dx.doi.org/10.2139/ssrn.2138242

Yaxuan Qi

City University of Hong Kong (CityUHK) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Lukas Roth

University of Alberta - Department of Finance and Statistical Analysis ( email )

2-32E Business Building
Edmonton, Alberta T6G 2R6
Canada
780-492-4431 (Phone)
780-492-3325 (Fax)

John K. Wald (Contact Author)

University of Texas at San Antonio ( email )

1 UTSA Circle
San Antonio, TX 78249
United States
210-458-6324 (Phone)

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