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Are enhanced creditor rights in bankruptcy desirable to shareholders? Evidence from the cost of equity capital

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  • Ni, Xiaoran
  • Xu, Jin
  • Yin, David

Abstract

Stronger creditor rights in bankruptcy are often viewed as adding deadweight costs and leading to inefficient liquidation. However, ex ante, they also increase firms' borrowing capacity and reduce financial constraints. This study investigates shareholders' overall attitudes toward enhanced creditor rights in bankruptcy by examining the impact of the staggered adoption of anti-recharacterization laws across U.S. states on the cost of equity capital. We find that the strengthening of creditor rights leads to a significant reduction in the cost of equity capital, with the effect being more pronounced among financially constrained firms and firms with more growth opportunities and volatile cash flows. The reduction is stronger among firms that are more likely to utilize securitized debt. Overall, our results suggest that enhanced creditor rights in bankruptcy improve shareholder value through increased borrowing capacity.

Suggested Citation

  • Ni, Xiaoran & Xu, Jin & Yin, David, 2025. "Are enhanced creditor rights in bankruptcy desirable to shareholders? Evidence from the cost of equity capital," Journal of Banking & Finance, Elsevier, vol. 175(C).
    • Handle: RePEc:eee:jbfina:v:175:y:2025:i:c:s0378426625000627
    DOI: 10.1016/j.jbankfin.2025.107442
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    More about this item

    Keywords

    Cost of equity capital; Creditor protection; Anti-recharacterization law; Repossession; Corporate governance;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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