Title

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

Author(s)

David Schoenherr David Schoenherr (Princeton University)

Jan Starmans Jan Starmans (Stockholm School of Economics)

Abstract

We examine how creditor protection affects firms with different levels of owners’ and man- agers’ 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’ and managers’ personal costs of bankruptcy. Empirically, we find support for these predictions using a Korean bankruptcy reform, which replaced receivership with management stay.

Creation Date

2021-08

Section URL ID

Paper Number

2020-43

URL

https://drive.google.com/file/d/0B1ijSZ0kc-DxQ2tzOERsREV6VUE/view?resourcekey=0-a2HQRcEURbiBvgB3WqchmQ

File Function

Jel

G31, G32, G33, G38, K22

Keyword(s)

Bankruptcy, personal costs of bankruptcy, investment, law and economics

Suppress

false

Series

13