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

David Schoenherr, Jan Starmans

Research output: Contribution to journalArticlepeer-review

Abstract

We examine how creditor protection affects firms with different levels of owners' and managers' personal costs of bankruptcy (PCB). Theoretically, we show that firms with high PCB borrow and invest more under a more debtor-friendly management stay system, whereas firms with low PCB 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' PCB. Empirically, we find support for these predictions using a Korean bankruptcy reform that replaced receivership with management stay.

Original languageEnglish (US)
Pages (from-to)2669-2717
Number of pages49
JournalJournal of Finance
Volume77
Issue number5
DOIs
StatePublished - Oct 2022

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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