11. Bankruptcy Law

Question 1

Bankruptcy

Answer 1

Bankruptcy is the legal status of a firm, person, or other entity that is unable to repay its creditors

Question 2

When a firm is in bankruptcy, there are two possibilities:

Answer 2

• Liquidate the firm and pay the creditors

- Design a reorganisation plan to avoid liquidation of assets

Question 3

Bankruptcy codes

Answer 3

• Debtor friendly: shareholders retain all control rights in bankruptcy (U.S.)
• Creditor friendly: all control rights are transferred to a firm’s creditor (Germany)

Question 4

In countries with weaker rights, lenders are more likely to:

Answer 4

o Charge higher interest rates
o Lend less with higher legal risk
o Set shorter maturities (more frequently monitoring)

Question 5

In countries with better contract enforceability, lenders are more likely to:

Answer 5

o Increase loan sizes
o Lengthen loan maturity
o Reduce loan spreads

Question 6

In countries with better creditor rights, lenders are more likely to:

Answer 6

o Reduce loan spreads

Question 7

Paper examines the effect of creditor rights and property rights protection on loan contracts - Bae et al.

Answer 7

During the crisis, loans in countries with strong property and creditor rights had lower spreads in the loans

Question 8

Paper Acharya

Countries with stronger property rights have ..

In countries with strong creditor rights ..

Answer 8

• Greater sizes of loans
• Longer maturities
• Lower spreads
• The loan spread is lower

Question 9

Paper Acharya

Moreover, during the financial crisis ..

In countries with better rights ..

Answer 9

• Property and creditor rights become more relevant for loan outcomes
• The loan spreads are lower

Question 10

Creditor rights

Answer 10

Creditor rights regulate a potential conflict of interest between a debtor and creditor during bankruptcy

Question 11

Creditor-friendly

Answer 11

• All control rights transferred to creditors

Question 12

Debtor-friendly

Answer 12

• Equity holders retain control

Question 13

Trade-off between creditor-friendly and debtor-friendly

Answer 13

• More creditor-friendly decreases loan spreads, which makes credit cheaper for borrowers.
• But debtors would then have weaker rights, which causes a higher risk of liquidation and it might encourage risk taking behaviour.

Question 14

Countries that became more creditor-friendly generated ..

Answer 14

• Less patents
• Less citations of those patents
• Have less patenting firms

Question 15

Countries that became more debtor-friendly generated

Answer 15

• More patents
• More citations of those patents
• Have more patenting firms