Insolvency regimes and firms' default risk under economic uncertainty and shocks

Balagopal Gopalakrishnan and Sanket Mohapatra

Economic Modelling, 2020, vol. 91, issue C, 180-197

Abstract: One of the arguments often advanced for implementing a stronger insolvency and bankruptcy framework is that it enhances credit discipline among firms. Using a large cross-country firm-level dataset, we empirically test whether a stronger insolvency regime reduces firms' likelihood of defaulting on their debt. In particular, we examine whether it reduces default risk during increased economic uncertainty and various external shocks. Our results confirm that a stronger insolvency regime moderates the adverse effects of economic shocks on firms' default risk. The effects are more pronounced for firms in the top half of the size distribution. We also explore channels through which improved creditor rights influence firms' default risk, including dependence on external finance, corporate leverage, and managerial ethics. Our main results are robust to an alternative measure of default risk, inclusion of currency and sovereign debt crisis episodes, and alternative estimations.

Keywords: Insolvency; Bankruptcy; Default risk; Economic policy uncertainty; Sovereign debt crisis; Currency crisis (search for similar items in EconPapers)
JEL-codes: G30 G32 G33 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0264999319319613
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Insolvency Regimes and Firms' Default Risk Under Economic Uncertainty and Shocks (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:91:y:2020:i:c:p:180-197

DOI: 10.1016/j.econmod.2020.06.005

Access Statistics for this article

Economic Modelling is currently edited by S. Hall and P. Pauly

More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().