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Insolvency Regimes and Firms' Default Risk Under Economic Uncertainty and Shocks

Balagopal Gopalakrishnan () and Sanket Mohapatra

MPRA Paper from University Library of Munich, Germany

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)
New Economics Papers: this item is included in nep-cfn and nep-rmg
Date: 2019-10-01
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