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Bankruptcy law and corporate investment decisions

Emanuele Tarantino

Journal of Banking & Finance, 2013, vol. 37, issue 7, 2490-2500

Abstract: Major European countries have recently adopted bankruptcy codes that strengthen entrepreneurs’ power to renegotiate outstanding liabilities. Renegotiation in bankruptcy allows lenders to increase recovery rates, however it also weakens the contract’s ability to solve the moral hazard problem embedded in the production project. Hinging on this trade-off, I show in which circumstances a soft bankruptcy law that resembles Chapter 11 in the balance of lenders’ and entrepreneur’s rights encourages the choice of investments that privilege the achievement of long-term results. However, I also show that, in contrast to the common wisdom, soft bankruptcy can lead to the choice of investments that are biased towards the achievement of short-term outcomes.

Keywords: Bankruptcy law; Financial contracts; Limited commitment; Soft budget constraint; Short-termism (search for similar items in EconPapers)
JEL-codes: D82 G33 K22 (search for similar items in EconPapers)
Date: 2013
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Working Paper: Bankruptcy Law and Corporate Investment Decisions (2009) Downloads
Working Paper: Bankruptcy Law and Corporate Investment Decisions (2009) Downloads
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DOI: 10.1016/j.jbankfin.2013.02.007

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