Department of Economics, Stockholm University
SE-106 91 Stockholm Sweden
Institutional Affiliation: Stockholm University
NBER Working Papers and Publications
|September 2013||Insolvency Resolution and the Missing High Yield Bond Markets|
with : 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...
Published: Bo Becker & Jens Josephson, 2016. "Insolvency Resolution and the Missing High-Yield Bond Markets," Review of Financial Studies, Society for Financial Studies, vol. 29(10), pages 2814-2849. citation courtesy of