Working Paper: NBER ID: w19415
Authors: Bo Becker; Jens Josephson
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.
Keywords: bankruptcy; corporate debt; bond markets; insolvency resolution
JEL Codes: G32; G33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bankruptcy efficiency (G33) | corporate bond issuance (G32) |
| bankruptcy efficiency (G33) | corporate bond issuance for high-risk firms (G32) |
| bankruptcy efficiency (G33) | capital structure alteration (G32) |
| firm risk profiles (G32) | debt structure (G32) |
| bankruptcy efficiency (G33) | switch between debt types for high-risk firms (G32) |
| bankruptcy efficiency (G33) | bond issuance for safe firms (G32) |