Creditor Protection, Ease of Repossession, and the Cost of Equity Capital: Evidence from Quasi-natural Experiments

43 Pages Posted: 15 Oct 2020

See all articles by Xiaoran Ni

Xiaoran Ni

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE); Xiamen University - School of Economics

David Yin

Miami University of Ohio

Date Written: August 26, 2020

Abstract

Exploiting the staggered adoption of anti-recharacterization laws across various U.S. states as quasi-exogenous shocks to secured lenders’ ability to repossess assets in bankruptcy, we find that the strengthening of creditor rights is associated with a significant decrease in the cost of equity capital. This effect is more pronounced among firms that are more financially constrained and weakly governed. We further find that the adoption of such laws is associated with lower information asymmetry and lower firm risk. Our overall findings indicate that strengthened creditor protection can lead to a better alignment of the interests of shareholders and creditors through improved financing capacity and creditor monitoring.

Keywords: Cost of Equity Capital, Creditor Protection, Anti-recharacterization Law, Repossession, Corporate Governance

JEL Classification: G32, G34, G38

Suggested Citation

Ni, Xiaoran and Yin, David, Creditor Protection, Ease of Repossession, and the Cost of Equity Capital: Evidence from Quasi-natural Experiments (August 26, 2020). Available at SSRN: https://ssrn.com/abstract=3678059 or http://dx.doi.org/10.2139/ssrn.3678059

Xiaoran Ni

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

D 204, Economics Building
Xiamen, Fujian 361005
China

Xiamen University - School of Economics ( email )

China

David Yin (Contact Author)

Miami University of Ohio ( email )

Oxford, OH 45056
United States

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