Cross-country variations in capital structures: The role of bankruptcy codes

Abstract

We investigate the impact of bankruptcy codes on firms' capital-structure choices. We develop a theoretical model to identify how firm characteristics may interact with the bankruptcy code in determining optimal capital structures. A novel and sharp empirical implication emerges from this model: that the difference in leverage choices under a relatively equity-friendly bankruptcy code (such as the US's) and one that is relatively more debt-friendly (such as the UK's) should be a decreasing function of the anticipated liquidation value of the firm's assets. Using data on the US and the UK over the period 1990 to 2002, we subject this prediction to both parametric and nonparametric tests, using different proxies for liquidation values and different measures of leverage. In support for the theory, we find that our proxies for liquidation value are both statistically and economically significant in explaining leverage differences across the two countries. In contrast, many of the other factors that are known to affect within-country leverage (e.g., size) cannot explain differences in leverage across countries.

Forecasting Distress in European SME Portfolios

“…Thus, we expect distress rates to be negatively related to recovery rates and positively related to the time it takes to resolve insolvency proceedings. The above is also consistent with Acharya et al (2011), who show that firms in countries with stronger creditor rights (thus higher recoveries) are more conservatively financed (i.e. have less debt).…”

The Costs of Being Private: Evidence from the Loan Market

“…2 Finally, our paper also provides some potential insights into the relative borrowing costs of being private in the US, since there is considerable overlap between the UK and US nancial systems and corporate governance structures (see e.g. Archarya, John, and Sundaram (2006) and Allen, Carletti, and Marquez (2006)). …”

Debt enforcement, investment, and risk taking across countries

“…La Porta, Lopez-de-Silanes and Shleifer (2008)), an improvement in creditor rights may also have adverse effects on firms. For example, Acharya, Sundaram and John (2011) show that corporations reduce leverage in response to stronger creditor rights to avoid inefficient liquidation in bankruptcy. Acharya, Amihud, and Litov (2011) find that away from distress, firms' investment decisions may be biased towards safer projects to mitigate creditors' liquidation biases.…”