When Should Bankruptcy Law Be Creditor- or Debtor-Friendly

When Should Bankruptcy Law Be Creditor- or Debtor-Friendly

David Schoenherr, Jan Starmans

Series number :

Serial Number: 
512/2017

Date posted :

September 24 2016

Last revised :

December 03 2019
SSRN Share

Keywords

  • Bankruptcy • 
  • benefits of control • 
  • capital structure • 
  • investment • 
  • law and economics

We examine how stronger creditor protection affects firms with different levels of private benefits of control. Theoretically, we show that firms with high private benefits of control borrow and invest more under a more debtor-friendly management stay system, whereas firms with low private benefits of control borrow and invest more under a more creditor-friendly receivership system.

Intuitively, stronger creditor protection alleviates the impact of credit market frictions, but reduces credit demand. Which effect dominates depends on firms' private benefits of control. Empirically, we find support for these predictions using a Korean bankruptcy reform, which replaced receivership with management stay.

Authors

Real name:
Jan Starmans