Bankruptcy

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Exploiting a bankruptcy reform in Korea, I examine how managers’ personal bankruptcy costs affect firms’ financing and investment decisions. Under the pre-reform auction system, incumbent management was forced to resign and the firm was auctioned to new investors. Under the post-reform management stay system, incumbent management stays in control of the firm during bankruptcy proceedings. I find that firms curb risk- taking under the auction system, when bankruptcy states are costlier for managers.

August 23 2019

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