Bankruptcy and cross-country differences in productivity

Abstract

For a sample of OECD countries, I document a systematic positive relationship between i) aggregate productivity, ii) the employment share by large firms and iii) the proportion of large firms in the economy. I propose that differences in bankruptcy procedures can explain this relationship. In a model of financial intermediation and informational frictions, I show that as bankruptcy procedures worsen -measured by the amount a lender can recover from bankrupt borrowers -lenders respond by i) shifting their portfolio of loans to smaller (less productive) firms and ii) lending less. This finding is supported by empirical evidence: across countries, efficient bankruptcy procedures are associated with a higher proportion of new bank loans allocated to large firms. In the model, moving the level of recovery rate from the U.S. level to that of the lowest recovery rate country in the OECD sample reduces TFP by around 30 percent.

Agency costs and credit availability: an international study

“…Ponticelli and Alencar (2016) show that in Brazil, a bankruptcy reform and better enforcement increasing secured creditors' protection, led to better access to finance and a Agency costs and credit availability larger increase in investment and output. Neira (2019) provides evidence from a sample of OECD countries that an efficient bankruptcy framework is associated with a higher proportion of new bank loans allocated to large firms and better productivity of these firms.…”

Indian Insolvency Law

“…Creditors can recover a larger part of their investment; more employees keep their jobs, and the network of suppliers and customers is preserved. Studies show that effective reforms of creditor rights are associated with lower costs of credit, increased access to credit, improved creditor recovery and strengthened job preservation (Klapper & Clasessens et al, 2002; Neira, 2019). If at the end of insolvency proceedings, creditors can recover most of their investments, they can continue reinvesting in firms and improving companies’ access to credit.…”

Business Regulation in South Asia and the Belt and Road Initiative

“…Research on the enactment of China's 2007 property law, which increased creditors' rights over the assets underlying their secured loans to private companies and increased protection granted to private companies against potential expropriation, shows that enactment of the law resulted in an increase in firm value (Berkowitz, Lin, and Ma 2015). Most recent research also associates credit infrastructure characterized by strong insolvency regimes with lower credit costs, increased access to finance, higher recovery rates, and better labor market outcomes (Neira 2017).…”