Bankruptcy Codes and Innovation

Acharya, Viral V.; Subramanian, Krishnamurthy

doi:10.2139/ssrn.971566

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Bankruptcy Codes and Innovation

AFA 2008 New Orleans Meetings Paper

55 Pages Posted: 16 Mar 2007 Last revised: 25 Oct 2014

See all articles by Viral V. Acharya

Viral V. Acharya

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

Krishnamurthy Subramanian

Indian School of Business (ISB), Hyderabad

There are 4 versions of this paper

Date Written: April 1, 2007

Abstract

We argue that when bankruptcy code is creditor-friendly, excessive liquidations cause levered firms to shun innovation, whereas by promoting continuation upon failure, a debtor-friendly code induces greater innovation. We provide empirical support for this claim by employing patents as a proxy for innovation. Using time-series changes within a country and cross-country variation in creditor rights, we confirm that a creditor-friendly code leads to lower absolute level of innovation by firms as well as relatively lower innovation by firms in technologically innovative industries. When creditor rights are stronger, technologically innovative industries employ relatively less leverage and grow disproportionately slower.

Keywords: Creditor rights, R&D, Technological change,Law and finance, Entrepreneurship, Growth, Financial development

JEL Classification: G3, K2, O3, O4, O5

Suggested Citation: Suggested Citation

Acharya, Viral V. and Acharya, Viral V. and Subramanian, Krishnamurthy, Bankruptcy Codes and Innovation (April 1, 2007). AFA 2008 New Orleans Meetings Paper, Available at SSRN: https://ssrn.com/abstract=971566 or http://dx.doi.org/10.2139/ssrn.971566