Insolvency Resolution and the Missing High Yield Bond Markets

Bo Becker and Jens Josephson

No 19415, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In many countries, bankruptcy is associated with low recovery by creditors. We develop a model of corporate credit markets in such an environment. Corporate credit is provided by either a bond market or risk-averse banks. Restructuring of insolvent firms happens out of court if in-court bankruptcy is inefficient, giving banks an advantage over bondholders. Riskier borrowers will use bank loans anywhere, but also bonds when bankruptcy is efficient. The model matches empirical debt mix patterns better than fixed-issuance-cost models. Across systems, efficient bankruptcy should be associated with more bond issuance by high-risk borrowers. This effect is small or absent for safe firms. We find that both predictions hold both cross-country and using insolvency reforms as natural experiments. Our empirical estimates suggest that a one-standard-deviation increase in the efficiency of bankruptcy is associated with an increase in the stock of corporate bonds equal to 5% of firm assets. This is equivalent to two thirds of the difference between the US and other countries.

JEL-codes: G32 G33 (search for similar items in EconPapers)
Date: 2013-09
New Economics Papers: this item is included in nep-ban
Note: CF
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Citations: View citations in EconPapers (3)

Published as Bo Becker & Jens Josephson, 2016. "Insolvency Resolution and the Missing High-Yield Bond Markets," Review of Financial Studies, Society for Financial Studies, vol. 29(10), pages 2814-2849.

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