Cross-Country Variations in Capital Structures the Role of Bankruptcy Codes

46 Pages Posted: 21 May 2004 Last revised: 8 Jan 2009

See all articles by Viral V. Acharya

Viral V. Acharya

New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance

Rangarajan K. Sundaram

New York University (NYU) - Department of Finance

Kose John

New York University (NYU) - Department of Finance

Multiple version iconThere are 3 versions of this paper

Date Written: December 21, 2008

Abstract

We investigate the impact of bankruptcy codes on firms' capital-structure choices. We develop a theoretical model to identify how firm characteristics may interact with the bankruptcy code in determining optimal capital structures. A novel and sharp empirical implication emerges from this model: that the difference in leverage choices under a relatively equity-friendly bankruptcy code (such as the US's) and one that is relatively more debt-friendly (such as the UK's) should be a decreasing function of the anticipated liquidation value of the firm's assets.

Using a large database of firms from the US and the UK over the period 1990 to 2002, we subject this prediction to extensive empirical testing, both parametric and non-parametric, using different proxies for liquidation values and different measures of leverage. We find strong support for the theory; that is, we find that our proxies for liquidation value are both statistically and economically significant in explaining leverage differences across the two countries. On the other hand, many of the other factors that are known to affect within-country leverage (e.g., size) cannot explain across-countries differences in leverage.

Keywords: Capital structure, bankruptcy, financial distress, asset specificity, bankruptcy code, bankruptcy costs

JEL Classification: G32, G33, F30

Suggested Citation

Acharya, Viral V. and Sundaram, Rangarajan K. and John, Kose, Cross-Country Variations in Capital Structures the Role of Bankruptcy Codes (December 21, 2008). AFA 2005 Philadelphia Meetings; Tuck Contemporary Corporate Finance Issues III Conference Paper. Available at SSRN: https://ssrn.com/abstract=548523 or http://dx.doi.org/10.2139/ssrn.548523

Viral V. Acharya (Contact Author)

New York University - Leonard N. Stern School of Business ( email )

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Suite 9-160
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United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Rangarajan K. Sundaram

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0308 (Phone)
212-995-4233 (Fax)

Kose John

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0337 (Phone)
212-995-4233 (Fax)

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