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

42 Pages Posted: 8 Jun 2021 Last revised: 21 Sep 2021

See all articles by Aras Canipek

Aras Canipek

University of Konstanz

Axel H. Kind

University of Konstanz

Sabine Wende

University of Cologne - Faculty of Management, Economics and Social 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, but also increase distress costs and thus may prompt firms to lower leverage and undertake risk-reducing but unprofitable investments. Using a German bankruptcy law reform, on average, we find evidence consistent with the latter. We also hypothesize and find evidence that the effect of creditor rights depends on the firm type (most importantly, the firm size), as it influences the effect of creditor rights on credit costs and distress costs and thus which effect outweighs. Our understanding not only reconciles the mixed empirical evidence of existing studies, but also 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 prevailing overweight.

Keywords: Creditor Rights, Bankruptcy Law, Corporate Leverage, Corporate Investments

JEL Classification: G31, G32, G33, G34

Suggested Citation

Canipek, Aras and Kind, Axel H. and Wende, Sabine, 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)

University of Konstanz ( email )

Fach D-144
Universitätsstraße 10
Konstanz, D-78457
Germany

Axel H. Kind

University of Konstanz

Universitätsstraße 10
Konstanz, D-78457
Germany

Sabine Wende

University of Cologne - Faculty of Management, Economics and Social Sciences ( email )

Albertus-Magnus-Platz
Cologne, D-50923
Germany

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