Busy Bankruptcy Courts and the Cost of Credit
81 Pages Posted: 20 Dec 2017 Last revised: 7 Sep 2021
Date Written: August 20, 2021
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.
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