Insolvency Codes and Investment: Theory and Evidence from Panel Data
33 Pages Posted: 12 Nov 2003
Date Written: September 15, 2003
This paper studies which characteristics of the financial insolvency codes give rise to two well-known investment problems (underinvestment and overinvestment). The empirical evidence is obtained by estimating the q investment model which incorporates cash flow. Our results show a negative effect of ex-ante costs on investment. Furthermore, the sensitivity of investment to cash flow depends on the characteristics embodied in each code. Although those giving rise to underinvestment have a negative effect, the magnitude of this effect is greater for the characteristics referring to reorganization without creditors' consent, and the lack of control by creditors.
Keywords: insolvency codes, investment, insolvency costs
JEL Classification: G31, G33, G38
Suggested Citation: Suggested Citation