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We show that delinquent loans are serviced differently depending on their securitization status. Conditional on a loan becoming seriously delinquent, we find a significantly lower foreclosure rate associated with loans held by the bank ('portfolio' loans) when compared to similar loans that are securitized; the likelihood of a portfolio loan default is lower in relative terms by about 20-30% for all the loans and about 30-50% for loans of better credit quality. This evidence supports the view that, relative to servicers of securitized loans, servicers of portfolio loans undertook actions that resulted in lower rates of foreclosure. Our findings suggest that securitization imposes significant renegotiation costs and a failure to renegotiate securitized loans may have substantially contributed to the recent surge in foreclosures. A policy intervention that allows for renegotiation of securitized loans could result in significant welfare gains.

This paper examines the effect of labor protection on firm financial structure. We exploit inter-temporal variations in employment protection laws across 21 OECD countries and find that labor friendly reforms are associated with a reduction in firm leverage. We also find that the negative effect of labor protection on leverage is more pronounced in firms that rely more on labor, are subject to more frequent hiring and firing, and have lower liquidation value. These results are consistent with the view that employment protection increases operating leverage and thus crowds out financial leverage. Furthermore, we find that increases in employment protection impact negatively firm investment and growth in sectors that are more dependent on external capital. These results indicate that firms' reduced ability to raise external capital, due to stronger labor protection, has negative real effects.

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