Insolvency Codes and Investment: Theory and Evidence from Panel Data

Abstract

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