NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

NBER Publications by Jens Josephson

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September 2013Insolvency Resolution and the Missing High Yield Bond Markets
with Bo Becker: w19415
In many countries, bankruptcy is associated with low recovery by creditors. We develop a model of corporate credit markets in such an environment. Corporate credit is provided by either a bond market or risk-averse banks. Restructuring of insolvent firms happens out of court if in-court bankruptcy is inefficient, giving banks an advantage over bondholders. Riskier borrowers will use bank loans anywhere, but also bonds when bankruptcy is efficient. The model matches empirical debt mix patterns better than fixed-issuance-cost models. Across systems, efficient bankruptcy should be associated with more bond issuance by high-risk borrowers. This effect is small or absent for safe firms. We find that both predictions hold both cross-country and using insolvency reforms as natural experiments. Ou...

Contact and additional information for this authorAll papers and publicationsWorking Papers onlyWorking Papers with publication info

 
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