Bankruptcy Codes and Innovation

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

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

Krishnamurthy Subramanian

Indian School of Business (ISB), Hyderabad

Multiple version iconThere 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

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

Viral V. Acharya (Contact Author)

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

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Suite 9-160
New York, NY NY 10012
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

Krishnamurthy Subramanian

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

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