The balance of power between creditors and the firm: Evidence from German insolvency law

Closset, Frédéric; Urban, Daniel

doi:10.1016/j.jcorpfin.2019.06.004

Cited by 16 publications

(10 citation statements)

References 45 publications

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“…We contribute to the literature in the following ways. First, while past research has analyzed the demand-side and supply-side arguments of credit (Vig, 2013;Closset and Urban, 2019), we offer a firm-level driver, promoter holdings, as an important determinant that explains the underlying reason for the demand theory of credit. Second, we contribute to the existing literature on the demand side by looking at the impact of bankruptcy reforms on debt structure which is relatively underexplored.…”

Section: Promoter Ownership and Bankruptcy Reformsmentioning

confidence: 99%

“…Vig (2013) and Closset and Urban (2019) find support in favor of the demand-side effect of creditor rights. While the findings of Vig (2013) are from India, a developing common law country, the study of Closset and Urban (2019) is based on a developed civil law country-Germany. Araujo et al (2012) and Funchal (2008) exploit the Brazilian Bankruptcy reforms of 2005, and they find a significant increase in the total debt, long-term debt and a reduction in the cost of debt.…”

Section: Introductionmentioning

confidence: 97%

“…On the other hand, the demand-side (substitution-effect) argument states that excessive creditor rights will result in less demand for borrowed firms, as firms fear that creditors have greater incentives to liquidate the firm even when the continuation is more optimal (Goyal et al, 2019). Vig (2013) and Closset and Urban (2019) find support in favor of the demand-side effect of creditor rights. While the findings of Vig (2013) are from India, a developing common law country, the study of Closset and Urban (2019) is based on a developed civil law country-Germany.…”

Section: Introductionmentioning

confidence: 99%

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Promoter ownership and bankruptcy reforms: evidence from India

Ramesh

Ramesh²,

Jithesh³

2022

IGDR

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Purpose The demand-side view of creditor rights posits a negative association between creditor rights and corporate borrowings. The purpose of this paper is as follows: first, the author examines whether the demand-side effect is more pronounced amongst firms with excess promoter shareholding. Subsequently, the authors analyze the impact of high promoter holdings on investment decisions owing to bankruptcy reforms. Design/methodology/approach To answer the above questions, the authors exploit the passage of the Insolvency and Bankruptcy Code (IBC) (2016) that strengthens the creditor rights of lenders, which impacts the borrowings and financing activities of Indian corporates. Using a panel of listed Indian firms over the period of 2012–2019, the authors analyze how the IBC affects firms’ borrowings and financing decisions with excess promoter holdings. Findings The authors find that bankruptcy reforms led to a statistically significant decline in the use of borrowed funds (primarily secured and long-term debt) by firms with high concentrated holdings. The analysis also indicates that firms with excess promoter ownership face an increased cost of debt due to bankruptcy reforms. As a result, firms with excess promoter holdings curtail their investments. Overall, the results indicate that India’s bankruptcy reforms significantly affect the firms’ financing and investment decisions with highly concentrated ownership. Originality/value While past research has explored the relationship between bankruptcy reforms and demand for/supply of debt, the authors provide novel empirical evidence on the role of promoter holdings that affects the relationship between bankruptcy law and financing and investment decisions. To the best of the author’s knowledge, this study is the first to investigate the role of ownership structure in the context of bankruptcy reforms by using a quasi-natural experiment.

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Section: Promoter Ownership and Bankruptcy Reformsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 97%

Section: Introductionmentioning

confidence: 99%

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Promoter ownership and bankruptcy reforms: evidence from India

Ramesh

Ramesh²,

Jithesh³

2022

IGDR

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“…ESUG was initially developed in September 2010, announced in March 2011, passed in by the German Bundestag in December 2011, and came into effect in March 2012. Although a full year passed between its first draft and it being passed in parliament there was uncertainty as to when it would be passed and the exact details to be included in the reform (Closset and Urban, 2018).…”

Section: A2 German Insolvency Law and Reformmentioning

confidence: 99%

Identifying Empty Creditors with a Shock and Micro-Data

et al. 2020

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Firms with credit-default swaps (CDS) traded on their debt may face "empty creditors" as hedged creditors have less incentive to participate in firm restructuring. We test for the existence of empty creditors by employing an exogenous change to the bankruptcy code in Germany, that effectively removes their potential impact on CDS firms. Using a unique dataset on bank-firm CDS net notional and credit exposures we find that the probability of default for firms with CDS traded on them drops when the effect of empty creditors is removed. This effect increases in the average CDS hedge position of a firm's creditors and in the concentration of the firm's debt. Further, we find that firms with longer credit relationships, with higher average collateral ratios of their debt, and financially safer firms are less affected by empty creditors. Banks that are not capital constrained, and that are liquidity constrained recognise the empty creditor effect to a larger extent. Furthermore, banks' business models affect the degree to which they recognise the empty creditor effect. Where banks that monitor their creditors less and that earn a smaller portion of their income from interest activities, recognise the empty creditor effect to a larger extent.

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“…The German insolvency law (Insolvenzordnung [Insolvenzordung 1994]hereinafter referred to as InsO) provides for the following reasons for initiating recovery proceedings or declaring bankruptcy: insolvency, threat of insolvency and overindebtedness (Closset and Urban, 2019). Insolvency occurs when the debtor is unable to meet their due pecuniary obligations ( § 17 paragraph 2 of InsO).…”

Section: Law Aspects Of Bankruptcymentioning

confidence: 99%

The Problem of Bankruptcy in Listed Companies

Tarczyński¹,

Łuniewska²,

Flaga-Gieruszyńska³

2020

ERSJ

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The paper presents an investigation of the bankruptcy of companies listed on the Warsaw Stock Exchange using the Fundamental Power Index in dynamic terms (FPI). Design/Methodology/Approach: The methodology of the Fundamental Power Index (FPI) was used to assess bankruptcy. In general, the essence of the indicator is a synthetic assessment of the company's fundamental strength. The indicator can take high and low values. The appearance of low levels of the ratio for the company is not favourable and indicates a problem in the financial standing area. As a consequence, the level of the ratio may signal a risk of bankruptcy. The article also discusses the legal grounds for bankruptcy of companies in Poland and selected EU countries. Findings: The results of the conducted research indicate that FPI may be a useful tool of early warning against bankruptcy. The dynamic approach to the index allowed for the assessment of the fundamental strength of the companies in the period of five years. At the same time, the level of the index indicated the risk of bankruptcy. The basis for the construction of the ratio was the financial data from the financial statements of the examined entities. In particular, information on financial ratios from the following groups was used: liquidity, profitability, debt and operational efficiency. Practical Implications: The implementation of the indicator concerns many areas, including investing, assessment of companies or the stock market. In the event of bankruptcy, information about the level of the ratio may support the management process of the company and early response of managers to avoid bankruptcy (e.g. by introducing recovery or restructuring programs). For the investor, the information about the low level of the ratio is a signal for actions related to risk management. Originality/Value: The results of the study reflect the applicability and effectiveness of the proposed indicator. Consequently, the fundamental strength index may constitute an alternative to the existing methods of assessing the bankruptcy process in enterprises.

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The balance of power between creditors and the firm: Evidence from German insolvency law

Cited by 16 publications

References 45 publications

Promoter ownership and bankruptcy reforms: evidence from India

Promoter ownership and bankruptcy reforms: evidence from India

Identifying Empty Creditors with a Shock and Micro-Data

The Problem of Bankruptcy in Listed Companies

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