Creditor Rights, Corporate Leverage and Investments, and the Firm Type

43 Pages Posted: 8 Jun 2021 Last revised: 11 Dec 2023

See all articles by Aras Canipek

Aras Canipek

Columbia University

Axel H. Kind

University of Konstanz

Jiri Tresl

University of Mannheim; Charles University in Prague - CERGE-EI, a joint workplace of Charles University and the Economics Institute of the Czech Academy of Sciences

Multiple version iconThere are 2 versions of this paper

Date Written: June 7, 2021

Abstract

Stronger creditor rights reduce credit costs and thus may allow firms to increase leverage and investments. Yet, they also increase distress costs and thus may prompt firms to lower leverage and undertake risk-reducing but unprofitable investments. Using a German bankruptcy reform, on average, we find evidence consistent with the latter hypothesis. We also hypothesize and find evidence that the effect of creditor rights on corporate leverage and investments depends on the firm type (particularly, firm size), as it influences the effect that creditor rights have on credit costs and distress costs and thus which effect dominates. Our understanding reconciles mixed empirical evidence and has important implications for optimal bankruptcy design. In particular, it points to a menu of procedures in which a debtor-friendly and creditor-friendly procedure co-exist and thus allow different types of firms to utilize the procedure that suits them best.

Keywords: creditor rights, bankruptcy law, corporate leverage, corporate investments

JEL Classification: G31, G32, G33, G34, G38, K22

Suggested Citation

Canipek, Aras and Kind, Axel H. and Tresl, Jiri, Creditor Rights, Corporate Leverage and Investments, and the Firm Type (June 7, 2021). Available at SSRN: https://ssrn.com/abstract=3861905 or http://dx.doi.org/10.2139/ssrn.3861905

Aras Canipek (Contact Author)

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Axel H. Kind

University of Konstanz

Universitätsstraße 10
Konstanz, D-78457
Germany

Jiri Tresl

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

Charles University in Prague - CERGE-EI, a joint workplace of Charles University and the Economics Institute of the Czech Academy of Sciences

Politickych veznu 7
Prague, 111 21
Czech Republic

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