Creditor Rights and Legal Transaction Costs

58 Pages Posted: 5 Aug 2023 Last revised: 20 May 2024

Date Written: August 3, 2023

Abstract

I estimate the relationship between increased creditor rights and legal expenditures of debtor corporations by evaluating a securitization law in India allowing secured creditors to seize collateral. The law decreased spending on legal proceedings used by firms to avoid foreclosure. Firms most affected by the law—with high proportions of tangible assets creditors could seize as collateral—significantly decreased spending on lawyers after the legislation. However, some debtor firms affected by the legislation filed for bankruptcy to take advantage of the automatic stay and prevent creditors from seizing their assets. These firms would have incurred legal costs related to the bankruptcy process. Consistent with this intuition, the post-reform decrease in legal costs is smaller for firms that were closer to insolvency or filed for bankruptcy after the legislation. The results indicate that legal transaction costs associated with foreclosure avoidance are sizable and can be eliminated by strengthening contract enforcement.

Keywords: creditor rights, capital structure, transaction costs, legal process

JEL Classification: G32, G33, G34, G38, K22, K41

Suggested Citation

Aggarwal, Dhruv, Creditor Rights and Legal Transaction Costs (August 3, 2023). Northwestern Law & Econ Research Paper No. 23-13, Northwestern Public Law Research Paper No. 23-42, Available at SSRN: https://ssrn.com/abstract=4529778 or http://dx.doi.org/10.2139/ssrn.4529778

Dhruv Aggarwal (Contact Author)

Northwestern Pritzker School of Law ( email )

750 N. Lake Shore Drive
Chicago, IL 60611
United States

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