The Ex Ante Effect of Creditor Rights on Corporate Financial and Investment Policy

54 Pages Posted: 12 Feb 2018 Last revised: 20 Nov 2019

See all articles by Aras Canipek

Aras Canipek

Columbia University

Axel H. Kind

University of Konstanz

Sabine Wende

University of Cologne - Faculty of Management, Economics and Social Sciences

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Date Written: January 29, 2019

Abstract

We examine the ex ante effect of an exogenous reduction in secured creditor rights on corporate financial and investment policy. We find that firms increase corporate leverage using both the reduced distress costs of secured debt and the positive externalities the lower secured creditor rights transfer to the borrowing costs of unsecured credit. Further, firms discard investments that reduce the risk of uncovering distress costs but are, however, less profitable. Our results suggest that firms eliminate unproductive protection mechanisms previously set in place to contract around costly bankruptcy legislations. This interpretation is confirmed by higher levels of risk and profitability. After establishing the average effect, we also show that the financing and investment response is highly dependent on the firm types which attract heterogeneous intensities in the positive (reduced distress costs) and negative (increased secured borrowing costs) effects of the weakened secured creditor rights. This result suggests that a uniform bankruptcy infrastructure that balances positive and negative effects of secured creditor rights is unsuited to be the optimal solution. Our finding rather points to a menu of bankruptcy procedures in which a debtor- and creditor-friendly code co-exist and thus allows different types of firms to contract for preferred procedures.

Keywords: Creditor Rights, Bankruptcy Codes, Capital Structure, Investment, Profitability, Risk, ESUG

JEL Classification: G31, G32, G33, G34

Suggested Citation

Canipek, Aras and Kind, Axel H. and Wende, Sabine, The Ex Ante Effect of Creditor Rights on Corporate Financial and Investment Policy (January 29, 2019). Available at SSRN: https://ssrn.com/abstract=3121980 or http://dx.doi.org/10.2139/ssrn.3121980

Aras Canipek (Contact Author)

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Axel H. Kind

University of Konstanz

Universitätsstraße 10
Konstanz, D-78457
Germany

Sabine Wende

University of Cologne - Faculty of Management, Economics and Social Sciences ( email )

Albertus-Magnus-Platz
Cologne, D-50923
Germany

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