Insolvency Resolution and the Missing High-Yield Bond Markets

Bo Becker and Jens Josephson

The Review of Financial Studies, 2016, vol. 29, issue 10, 2814-2849

Abstract: In many countries, poorly functioning bankruptcy procedures force viable but insolvent firms to restructure out of court, where banks may have a bargaining advantage over other creditors. We model the choice of restructuring process and derive implications for the corporate mix of bank and bond financing. Empirical patterns match the model: inefficient bankruptcy in a country is associated with less bond issuance by risky, but not by safe, borrowers. This pattern holds for both levels of and changes in bankruptcy recovery. Our results establish a link between bankruptcy reform and corporate bond markets, especially high-yield markets.Received September 29, 2014; accepted February 1, 2016 by Editor David Denis.

Date: 2016
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Working Paper: Insolvency Resolution and the Missing High Yield Bond Markets (2013)
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