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The Balance of Power between Creditors and the Firm: Evidence from German Insolvency Law

49 Pages Posted: 26 Oct 2017  

Frédéric Closset

Technical University of Munich

Daniel Urban

Technical University of Munich

Date Written: October 26, 2017

Abstract

In late 2011, German legislators passed the latest reform to German Insolvency Law (ESUG). ESUG mandates that creditors of larger firms can exert more influence on the appointment of the insolvency administrator, resulting in a shift of power from shareholders to creditors. Based on difference-in-differences estimation, we find that larger firms reduced financial leverage around this event, while firms below the size threshold of the law increased debt levels. Furthermore, after the enactment of ESUG, larger firms spend less money on investment, while smaller firms invest more and benefit from lower cost of debt. Overall, the evidence is consistent with the view that, in an environment where creditors are already well protected, even stronger creditor protection does not necessarily foster borrowing.

Keywords: Leverage, Bankruptcy, Insolvency, Agency Theory

JEL Classification: G32, G33, G38

Suggested Citation

Closset, Frédéric and Urban, Daniel, The Balance of Power between Creditors and the Firm: Evidence from German Insolvency Law (October 26, 2017). Available at SSRN: https://ssrn.com/abstract=3059449

Frédéric Closset (Contact Author)

Technical University of Munich ( email )

Munich, 80333
Germany

Daniel Urban

Technical University of Munich ( email )

Arcisstrasse 21
Munich, 80333
Germany

HOME PAGE: http://www.danielurban.org

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