Do Country-level Creditor Protections Affect Firm-level Debt Structure?

75 Pages Posted: 26 Jan 2017 Last revised: 25 Oct 2018

See all articles by Kose John

Kose John

New York University (NYU) - Department of Finance

Mahsa Kaviani

Temple University - Department of Finance

Lawrence Kryzanowski

Concordia University, Quebec - John Molson School of Business

Hosein Maleki

Temple University, Fox School of Business

Date Written: October 2018

Abstract

We study the effects of country-level creditor protections on the firm-level choice of debt structure. Using data from 46 countries, we show that firms have more concentrated debt structures in countries with stronger creditor protection. Firms choose debt structure concentrations by trading-off between the probability of a strategic default against an inefficient liquidation by creditors. In countries with strong creditor protections, managers are less likely to strategically default thus the trade-off shifts toward preventing inefficient liquidation. Firms, therefore, choose more concentrated debt structures to facilitate coordination among creditors thereby reduce the probability of inefficient liquidation. Firms with ex-ante higher bankruptcy costs, including those with more intangible assets and higher cash-flow volatilities, exhibit stronger effects. A difference-in-differences analysis of firms' debt structure responses to creditor rights reforms confirms the cross-country results. Our findings are robust to alternative settings and a battery of robustness checks.

Keywords: reditor rights, debt structure, capital structure, inefficient liquidation

JEL Classification: G32, K12

Suggested Citation

John, Kose and Kaviani, Mahsa and Kryzanowski, Lawrence and Maleki, Hosein, Do Country-level Creditor Protections Affect Firm-level Debt Structure? (October 2018). Fox School of Business Research Paper No. 18-012. Available at SSRN: https://ssrn.com/abstract=2905895 or http://dx.doi.org/10.2139/ssrn.2905895

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)

Mahsa Kaviani

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States

Lawrence Kryzanowski

Concordia University, Quebec - John Molson School of Business ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada

Hosein Maleki (Contact Author)

Temple University, Fox School of Business ( email )

Philadelphia, PA 19122
United States

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