Do Bankruptcy Codes Matter? A Study of Defaults in France, Germany and the UK

45 Pages Posted: 5 Jan 2005

See all articles by Sergei A. Davydenko

Sergei A. Davydenko

University of Toronto - Finance Area

Julian R. Franks

London Business School - Institute of Finance and Accounting; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Date Written: September 2006

Abstract

Using a large sample of small-to-medium size firms that defaulted on their bank debt in France, Germany, and the UK, we find that large differences in creditors' rights across countries lead banks to adjust their lending and reorganization practices to mitigate the expected creditor-unfriendly aspects of the bankruptcy law. In particular, French banks respond to a creditor-unfriendly code by requiring more collateral than lenders elsewhere, and by relying on particular collateral forms that minimize the statutory dilution of their claims in bankruptcy. Despite such adjustments, bank recovery rates in default remain sharply different across the three countries, reflecting different levels of creditor protection. Notwithstanding the high level of creditor protection and low expected losses from default, pre-distress loan spreads in the UK are not lower than elsewhere. We conclude that, despite significant adjustments in lending practices, bankruptcy codes still sharply affect default outcomes.

Keywords: Recovery rate, Default, Reorganization, Bankruptcy code

JEL Classification: G21, G30, G33

Suggested Citation

Davydenko, Sergei A. and Franks, Julian R., Do Bankruptcy Codes Matter? A Study of Defaults in France, Germany and the UK (September 2006). EFA 2005 Moscow Meetings Paper; ECGI - Finance Working Paper No. 89/2005; WFA 2005 Portland Meetings Paper; AFA 2005 Philadelphia Meetings Paper. Available at SSRN: https://ssrn.com/abstract=647861 or http://dx.doi.org/10.2139/ssrn.647861

Sergei A. Davydenko

University of Toronto - Finance Area ( email )

Toronto, Ontario M5S 3E6
Canada

Julian R. Franks (Contact Author)

London Business School - Institute of Finance and Accounting ( email )

Institute of Finance and Accounting
Sussex Place - Regent's Park
London NW1 4SA
United Kingdom
+44 20 7262 5050 x3449 (Phone)
+44 20 7724 3317 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

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