Evolution of Debtor Rights
50 Pages Posted: 14 Dec 2018 Last revised: 17 Sep 2020
Date Written: September 17, 2019
Debtor rights vis-a-vis creditor during bankruptcy can evolve over time due to changes in the nature of the prevailing bankruptcy law and its practice. I empirically study such a time-series trend in debtor rights using comprehensive sample of U.S. firms. To this end, I develop a dynamic model to estimate debtor rights and examine its implications. Larger debtor rights make debtors more willing to default, which increases borrowing costs. In response, firms lower leverage ex-ante. This channel helps to match joint distributions of leverage and default probabilities. Structural estimation reveals a change over time: debtor rights increased from 1.2% to 4.4% around the Bankruptcy Reform Act of 1978, and has gradually decreased back to zero in the subsequent four decades.
Keywords: Debtor rights, corporate bankruptcy, dynamic capital structure, structural estimation, corporate governance
JEL Classification: G31, G32, G33, G34
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