Financial innovations and corporate bankruptcy

Franks, Julian R.; Sussman, Oren

doi:10.1016/j.jfi.2004.07.002

Cited by 47 publications

(28 citation statements)

References 17 publications

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“…Antoniou, Guney and Paudyal (2002) investigate the determinants of leverage for French, German and British firms using panel data with a focus on the convergence of capital structure to a target maturity structure. A historical perspective on the evolution of the US and UK codes is provided by Franks and Sussman (2005), while Davydenko and Franks (2008) analyze the effect of bankruptcy codes in France, Germany and the UK on the recovery rates and collateral requirements of bank-based contracts.…”

Section: The Related Literaturementioning

confidence: 99%

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

Acharya

Sundaram

John

2011

Journal of Financial Intermediation

114

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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.

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Section: The Related Literaturementioning

confidence: 99%

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

Acharya

Sundaram

John

2011

Journal of Financial Intermediation

114

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“…Franks and Sussman (2005) argue that bankruptcy judges and lawyers who administer bankruptcy proceedings may be biased toward soft laws because soft laws increase demand for bankruptcy.…”

Section: Ii1 Means Testing As Income Indexed Debtmentioning

confidence: 99%

“…took effect (unlike with BAPCPA), nor did filings decrease after, they accelerated. 11 those enterprises to society at large (Franks and Sussman 2005). The fresh start concept in personal bankruptcy has a similar rationale.…”

Section: Ii2 Opposing Forcesmentioning

confidence: 99%

“…However, if income verification costs are prohibitive (Townsend 1979), or if contracting innovations by the private sector are stymied by free rider problems, welfare enhancing contracts (such as income-indexed contracts) may not be privately available or enforceable. Franks and Sussman (2005) argue that the state can improve on private contracting outcomes (by internalizing innovation externalities), but self-interest may bias the "bankruptcy bar" (Steel 2004) toward soft laws. Conflicting interests and suspicions about the intent of changes in bankruptcy law can also cause the law to cycle between soft and hard.…”

Section: Introductionmentioning

confidence: 99%

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The Bankruptcy Abuse Prevention and Consumer Protection Act: Means-Testing or Mean Spirited?

2007

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThousands of U.S. households filed for bankruptcy just before the bankruptcy law changed in 2005. That rush-to-file was more pronounced, we find, in states with more generous bankruptcy exemptions and lower credit scores. We take that finding as evidence that the new law effectively reduces exemptions, which in turn should reduce the "demand" for bankruptcy and the resulting losses to suppliers of consumer credit. We expect the savings to suppliers will be shared with borrowers by way of lower credit card rates, although credit card spreads have not yet fallen. If cheaper credit is the upside of the new law, the downside is reduced bankruptcy "insurance" against bad luck. The overall impact of the new law on the average household depends on how one weighs those two sides.

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“…One immediate answer is that in many countries the floating charge is legally forbidden (Djankov et al 2008a). More subtly, the floating charge may just be very hard to transplant, being as it is the end result of a long process of precedent accumulation that is specific to certain common law systems (Franks and Sussman 2005b). Another possibility is that countries may have opted for formal bankruptcy procedures as alternative mechanisms to mitigate the costs of creditor control under standard foreclosure.…”

Section: Contractual Resolutions Of Distress Around the Worldmentioning

confidence: 99%

Contractual Resolutions of Financial Distress

Gennaioli

Rossi

2009

SSRN Journal

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In a financial contracting model we study the optimal debt structure to resolve financial distress. We show that a debt structure where two distinct debt classes co-exist − one class fully concentrated and with control rights upon default, the other dispersed and without control rights − removes the controlling creditor's liquidation bias when investor protection is strong. These results rationalize the use and the performance of floating charge financing, debt financing where the controlling creditor takes the entire business as collateral, in countries with strong investor protection. More broadly, our theory predicts that the efficiency of contractual resolutions of financial distress should increase with investor protection.JEL classification: G33, K22.

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Financial innovations and corporate bankruptcy

Cited by 47 publications

References 17 publications

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

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

The Bankruptcy Abuse Prevention and Consumer Protection Act: Means-Testing or Mean Spirited?

Contractual Resolutions of Financial Distress

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