Creditor Rights, Debt Capacity and Securities Issuance: Evidence from Anti-Recharacterization Laws

Abstract

This paper examines the effects of improvement in creditors' rights protection on firms' financing choices and securities issuance. To address these issues, I exploit exogenous variation in creditors' rights protection induced by the staggered adoption of anti-recharacterization laws by some U.S. states. The laws enhance the ability of creditors to repossess collateral during bankruptcy. Using a difference-in-difference methodology to estimate the causal impacts, I find that: the laws are positively related to debt capacity and debt maturity. Firms increase market leverage and substitute away from costly short-term debt financing into long-term debt financing the laws are positively related to debt issuance the laws are negatively related to equity issuance. My analysis further demonstrates that proactive securities issuers are significantly more responsive to the adoption of anti-recharacterization laws than passive securities issuers.

Keywords: Creditors' Rights, Leverage, Debt Issues, Equity Issues, Pledgeable Assets, Anti-recharacterization

JEL Classification: G30, G31, G32, G33