Debt Structure When Bankruptcy Law Offers Incentives to Restructure

63 Pages Posted: 21 Apr 2016

See all articles by Iftekhar Hasan

Iftekhar Hasan

Fordham University ; Bank of Finland; University of Sydney

Kose John

New York University (NYU) - Department of Finance

Padma Kadiyala

Pace University - Lubin School of Business

Date Written: April 16, 2016

Abstract

We augment the LLSV creditor rights index with a new “restructuring index” that measures the incentives provided to creditors to grant concessions outside formal bankruptcy. We study the joint impact of the two indexes on a firm’s leverage policy. We show that the two indexes have at most a statistically weak effect on the level of long-term debt. Instead, the two indexes affect the distribution of long-term debt into bank debt, public debt and private placements. Bank debt increases when the values of both indexes are high. Public debt increases when the creditor rights index is high, but the restructuring index is low, and private placements increase when the restructuring index is high, but the creditor rights index is low. Smaller firms with fewer tangible assets borrow more from banks when both the creditor rights and restructuring indexes are high. When aggregated at the country level, these firm-level results suggest that bankruptcy law can influence the relative importance of credit and equity markets as sources of financing GDP growth.

Keywords: Bankruptcy Law, Debt Structure, Restructuring, Bank Debt, and Creditor Rights

JEL Classification: G32, G33, G38

Suggested Citation

Hasan, Iftekhar and John, Kose and Kadiyala, Padma, Debt Structure When Bankruptcy Law Offers Incentives to Restructure (April 16, 2016). Gabelli School of Business, Fordham University Research Paper No. 2767131; Pace University Finance Research Paper No. 2016/07. Available at SSRN: https://ssrn.com/abstract=2767131 or http://dx.doi.org/10.2139/ssrn.2767131

Iftekhar Hasan

Fordham University ( email )

45 COLUMBUS AVENUE
GBA-5TH FLOOR
NEW YORK, NY 10023
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Kose John

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0337 (Phone)
212-995-4233 (Fax)

Padma Kadiyala (Contact Author)

Pace University - Lubin School of Business ( email )

1 Pace Plaza
New York, NY 10038-1502
United States
914-773-3620 (Phone)

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