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Cross-country variations in capital structures: The role of bankruptcy codes

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  • Acharya, Viral V.
  • Sundaram, Rangarajan K.
  • John, Kose

Abstract

We investigate the impact of bankruptcy codes on firms' capital-structure choices. We develop a theoretical model to identify how firm characteristics may interact with the bankruptcy code in determining optimal capital structures. A novel and sharp empirical implication emerges from this model: that the difference in leverage choices under a relatively equity-friendly bankruptcy code (such as the US's) and one that is relatively more debt-friendly (such as the UK's) should be a decreasing function of the anticipated liquidation value of the firm's assets. Using data on the US and the UK over the period 1990-2002, we subject this prediction to both parametric and non-parametric tests, using different proxies for liquidation values and different measures of leverage. In support for the theory, we find that our proxies for liquidation value are both statistically and economically significant in explaining leverage differences across the two countries. In contrast, many of the other factors that are known to affect within-country leverage (e.g., size) cannot explain differences in leverage across countries.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Intermediation.

Volume (Year): 20 (2011)
Issue (Month): 1 (January)
Pages: 25-54

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Handle: RePEc:eee:jfinin:v:20:y:2011:i:1:p:25-54

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Web page: http://www.elsevier.com/locate/inca/622875

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Cited by:
  1. Akbel, Basak & Schnitzer, Monika, 2009. "Creditor Rights and Debt Allocation within Multinationals," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 304, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  2. Zhang, Andrew Jianzhong, 2012. "Distress risk premia in expected stock and bond returns," Journal of Banking & Finance, Elsevier, vol. 36(1), pages 225-238.
  3. Viral V. Acharya & Yakov Amihud & Lubomir Litov, 2009. "Creditor rights and corporate risk-taking," NBER Working Papers 15569, National Bureau of Economic Research, Inc.
  4. Viral V. Acharya & Krishnamurthy V. Subramanian, 2009. "Bankruptcy Codes and Innovation," Review of Financial Studies, Society for Financial Studies, vol. 22(12), pages 4949-4988, December.
  5. Breuer, Wolfgang & Rieger, M. Oliver & Soypak, K. Can, 2014. "The behavioral foundations of corporate dividend policy a cross-country analysis," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 247-265.
  6. Haselmann, Rainer & Pistor, Katharina & Vig, Vikrant, 2006. "How Law Affects Lending," MPRA Paper 157, University Library of Munich, Germany.
  7. Dang, Viet Anh, 2013. "An empirical analysis of zero-leverage firms: New evidence from the UK," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 189-202.
  8. Fan, Joseph P.H. & Huang, Jun & Zhu, Ning, 2013. "Institutions, ownership structures, and distress resolution in China," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 71-87.
  9. Miguel García-Posada & Juan S. Mora-Sanguinetti, 2013. "Are there alternatives to bankruptcy? a study of small business distress in Spain," Banco de Espa�a Working Papers 1315, Banco de Espa�a.

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