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

David Schoenherr and Jan Starmans

Journal of Finance, 2022, vol. 77, issue 5, 2669-2717

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.

Date: 2022
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https://doi.org/10.1111/jofi.13171

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