NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Vintage Capital and Creditor Protection

[In an international comparison of airlines and legal systems] better creditor rights are associated with aircraft of a younger vintage [and with] newer technology.

It is well established that legal rules designed to protect corporate shareholders and creditors are associated with more developed financial markets and stronger economic growth. Yet most of the research to support this belief has been based on cross-country macroeconomic outcomes, and it was not able to pin down the underlying mechanism through which creditor rights and shareholder protection affect real economic outcomes. In Vintage Capital and Creditor Protection (NBER Working Paper No. 15735), Efraim Benmelech and Nittai Bergman attempt to fill this gap by studying the airline industry, using a sample that includes most of the aircraft in the world (489,916 aircraft-year observations), which covers 5,987 operators in 129 countries over the years 1978-2003.

Benmelech and Bergman find that better creditor rights are associated with aircraft of a younger vintage, newer technology, and firms with larger aircraft fleets. The association between creditor rights and aircraft vintage is concentrated among non-leased commercial aircraft. Airlines with lower leverage ratios and less debt naturally are less sensitive to creditor rights, because they are able to use internal funds rather than external capital to finance investment. In sum, better creditor protection helps airlines to mitigate financial shortfalls and enhances investment in newer, more efficient, and more technologically advanced aircraft.

The authors conclude that their results suggest a broader link -- not confined to the airline industry -- between investor protection, real corporate investment, and economic growth. They propose that "by mitigating financial shortfalls, enhanced legal protection of creditors facilitates the ability of firms to make large capital investments, adapt advanced technologies, and foster productivity."

-- Lester Picker

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