Busy Bankruptcy Courts and the Cost of Credit

77 Pages Posted: 20 Dec 2017 Last revised: 22 Apr 2020

Date Written: April 20, 2020

Abstract

What are the costs of congested court systems? This paper studies the 2005 consumer bankruptcy reform, which caused the largest recorded drop in the caseload of bankruptcy courts in the United States. The reform changed the law for individual debtors but left corporate bankruptcies unaffected. This generates plausibly exogenous variation in firms’ exposure to court backlog across bankruptcy districts. Using a difference-in-differences approach, I find that lower court congestion decreases credit spreads and increases loan maturities. Consistent with a shock to credit supply due to higher expected recovery values, less congested courts increase firm leverage but leave default risk unchanged.

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 (April 20, 2020). Available at SSRN: https://ssrn.com/abstract=3088676 or http://dx.doi.org/10.2139/ssrn.3088676

Karsten Müller (Contact Author)

Princeton University

Julis Romo Rabinowitz Building
Washington Road
Princeton, NJ 08544
United States

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