Evolution of Debtor Rights

50 Pages Posted: 14 Dec 2018 Last revised: 17 Sep 2020

See all articles by Daniel Kim

Daniel Kim

BI Norwegian Business School

Date Written: September 17, 2019

Abstract

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

Suggested Citation

Kim, Daniel, Evolution of Debtor Rights (September 17, 2019). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: https://ssrn.com/abstract=3288759 or http://dx.doi.org/10.2139/ssrn.3288759

Daniel Kim (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0484
Norway

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