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Are enhanced creditor rights in bankruptcy desirable to shareholders? Evidence from the cost of equity capital

Xiaoran Ni, Jin Xu and David Yin

Journal of Banking & Finance, 2025, vol. 175, issue C

Abstract: Stronger creditor rights in bankruptcy are often viewed as adding deadweight costs and leading to inefficient liquidation. However, ex ante, they also increase firms' borrowing capacity and reduce financial constraints. This study investigates shareholders' overall attitudes toward enhanced creditor rights in bankruptcy by examining the impact of the staggered adoption of anti-recharacterization laws across U.S. states on the cost of equity capital. We find that the strengthening of creditor rights leads to a significant reduction in the cost of equity capital, with the effect being more pronounced among financially constrained firms and firms with more growth opportunities and volatile cash flows. The reduction is stronger among firms that are more likely to utilize securitized debt. Overall, our results suggest that enhanced creditor rights in bankruptcy improve shareholder value through increased borrowing capacity.

Keywords: Cost of equity capital; Creditor protection; Anti-recharacterization law; Repossession; Corporate governance (search for similar items in EconPapers)
JEL-codes: G32 G34 G38 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:175:y:2025:i:c:s0378426625000627

DOI: 10.1016/j.jbankfin.2025.107442

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