Creditor protection laws, debt financing, and corporate investment over the business cycle

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review

20 Scopus Citations
View graph of relations

Author(s)

Related Research Unit(s)

Detail(s)

Original languageEnglish
Pages (from-to)477-497
Journal / PublicationJournal of International Business Studies
Volume48
Issue number4
Publication statusPublished - 1 May 2017

Abstract

We examine how legal creditor rights are related to debt financing and corporate investment over the business cycle. Using firm-level data from 40 countries, we find that creditor rights are associated with greater debt financing and investment during economic downturns, but creditor rights have a significantly smaller effect during expansions. The beneficial effects of creditor rights during recessions are stronger for firms that are more likely to have severe shareholder-bondholder agency problems. We also find that during recessions (relative to expansions) strong creditor rights are associated with a smaller decline in net capital flows. Our findings are consistent with credit market frictions increasing during recessions, and with stronger creditor rights decreasing the negative effects of these frictions. Overall, the results suggest that better creditor protection laws help moderate the decline in debt financing and investment during recessions.

Research Area(s)

  • agency costs, business cycles, creditor rights, debt financing, investment