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

60 Pages Posted: 14 Jun 2018 Last revised: 25 Apr 2019

See all articles by Frédéric Closset

Frédéric Closset

Technical University of Munich

Daniel Urban

Erasmus University Rotterdam (EUR) - Department of Business Economics

Date Written: April 24, 2019

Abstract

In 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 by about 4 to 7 percentage points relative to control firms. Furthermore, after the enactment of ESUG, larger firms spend less money on investment and pay higher interest rates. Overall, the evidence is consistent with the view that German creditor protection has become too strong.

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 (April 24, 2019). Available at SSRN: https://ssrn.com/abstract=3186114 or http://dx.doi.org/10.2139/ssrn.3186114

Frédéric Closset (Contact Author)

Technical University of Munich ( email )

Arcisstrasse 21
Munich, 80333
Germany

Daniel Urban

Erasmus University Rotterdam (EUR) - Department of Business Economics ( email )

Netherlands

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