When Should Bankruptcy Law Be Creditor- or Debtor-Friendly? Theory and Evidence

When Should Bankruptcy Law Be Creditor- or Debtor-Friendly? Theory and Evidence

David Schoenherr, Jan Starmans

Series number :

Serial Number: 
512/2017

Date posted :

September 24 2016

Last revised :

May 13 2020
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Keywords

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

We examine how creditor protection affects firms with different levels of owners’ and managers’ personal costs of bankruptcy.

Theoretically, we show that firms with high personal costs of bankruptcy borrow and invest more under a more debtor-friendly management stay system, whereas firms with low personal costs of bankruptcy borrow and invest more under a more creditor-friendly receivership system. Intuitively, stronger creditor protection relaxes financial constraints but reduces credit demand. Which effect dominates depends on owners’ andmanagers’ personal costs of bankruptcy. Empirically, we find support for these predictions using a Korean bankruptcy reform, which replaced receivership with management stay.
 

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Authors

Real name:
Jan Starmans