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

David Schoenherr and Jan Starmans
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David Schoenherr: Princeton University
Jan Starmans: Stockholm School of Economics

Working Papers from Princeton University. Economics Department.

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.

Keywords: Bankruptcy; personal costs of bankruptcy; investment; law and economics (search for similar items in EconPapers)
JEL-codes: G31 G32 G33 G38 K22 (search for similar items in EconPapers)
Date: 2021-08
New Economics Papers: this item is included in nep-cfn, nep-fdg and nep-law
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Persistent link: https://EconPapers.repec.org/RePEc:pri:econom:2020-43

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