Busy Bankruptcy Courts and the Cost of Credit

81 Pages Posted: 20 Dec 2017 Last revised: 7 Sep 2021

See all articles by Karsten Müller

Karsten Müller

National University of Singapore

Date Written: August 20, 2021

Abstract

This paper estimates the effect of bankruptcy court caseload on access to credit by exploiting firms’ plausibly exogenous exposure to the largest recorded drop in court backlog in the United States following the 2005 consumer bankruptcy reform. I show that a drop in court congestion reduces the time firms spend in bankruptcy and increases recovery values, which is priced into credit spreads and loan maturities. Consistent with a shock to credit supply, less congested courts increase firm leverage but leave default risk unchanged. A back-of-the-envelope calculation suggests that backlog in bankruptcy courts costs corporate borrowers at least $740 million per year in interest payments.

Keywords: bankruptcy, courts, debt enforcement, law and finance

JEL Classification: G21, G32, G33, K22, K42.

Suggested Citation

Müller, Karsten, Busy Bankruptcy Courts and the Cost of Credit (August 20, 2021). Journal of Financial Economics (JFE), 2021, Available at SSRN: https://ssrn.com/abstract=3088676 or http://dx.doi.org/10.2139/ssrn.3088676

Karsten Müller (Contact Author)

National University of Singapore

15 Kent Ridge Dr
Singapore
Singapore

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