The Dark Side of 2005 Bankruptcy Code Reform —Does Derivatives Privilege Affect Corporate Borrowing?

58 Pages Posted: 4 Sep 2017 Last revised: 9 Nov 2021

See all articles by Maggie Hu

Maggie Hu

The Chinese University of Hong Kong

Chenyu Shan

Shanghai University of Finance and Economics

Margaret Rui Zhu

The Chinese University of Hong Kong (CUHK)

Date Written: February 17, 2019

Abstract

The 2005 bankruptcy reform in the United States gave derivatives contracts an effective “supersenior” status. The reform aimed to stabilize the derivatives market and reduce systemic risk. However, we find evidence that the reform unintentionally results in a decline in corporate borrowing for derivatives-using firms: since 2005, derivative users have fewer loans. The loans they have obtained have smaller size, higher loan spreads, more stringent collateral requirements. The effects are more pronounced for those derivatives-using firms that are closer to bankruptcy and those with smaller lending base. Our paper sheds light on the dark side of the 2005 bankruptcy reform and helps clarify conflicts of interest among various types of creditors.

Keywords: Derivatives privilege, Bankruptcy Reform, Debt contracting, Conflict of interest

JEL Classification: G32, G33, G38

Suggested Citation

Hu, Maggie and Shan, Chenyu and Zhu, Margaret Rui, The Dark Side of 2005 Bankruptcy Code Reform —Does Derivatives Privilege Affect Corporate Borrowing? (February 17, 2019). Available at SSRN: https://ssrn.com/abstract=3031595 or http://dx.doi.org/10.2139/ssrn.3031595

Maggie Hu (Contact Author)

The Chinese University of Hong Kong ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Hong Kong, N.T.
Hong Kong

HOME PAGE: http://sites.google.com/site/maggiehuresearch/research

Chenyu Shan

Shanghai University of Finance and Economics ( email )

100 Wudong Road
Shanghai
China

Margaret Rui Zhu

The Chinese University of Hong Kong (CUHK) ( email )

Shatin, N.T.
Hong Kong
Hong Kong
+852 3943 3216 (Phone)

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