Bankruptcy law and firm size

Aras Canipek, Axel Kind, Lubomir Litov and Jiří Trešl

No 489, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: Weaker creditor rights can increase credit costs and thus prompt firms to reduce debt and investment. Yet, they can reduce distress costs and thus allow firms to increase leverage and eliminate risk-reducing but unprofitable investments. We hypothesize that firm size influences the effect of creditor rights on credit costs and distress costs and thus which effect dominates. Weaker creditor rights should have a negative effect for small firms but a positive effect for large firms. Using a German bankruptcy reform, we find support for our hypothesis. Our findings reconcile mixed evidence and have important implications for optimal bankruptcy design.

Keywords: creditor rights; bankruptcy law; debt; investments; firm size (search for similar items in EconPapers)
JEL-codes: G31 G32 G33 G34 G38 K22 (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:343060

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