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Bankruptcy law and corporate investment decisions

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  • Tarantino, Emanuele

Abstract

Major European countries have recently adopted bankruptcy codes that strengthen entrepreneurs’ power to renegotiate outstanding liabilities. Renegotiation in bankruptcy allows lenders to increase recovery rates, however it also weakens the contract’s ability to solve the moral hazard problem embedded in the production project. Hinging on this trade-off, I show in which circumstances a soft bankruptcy law that resembles Chapter 11 in the balance of lenders’ and entrepreneur’s rights encourages the choice of investments that privilege the achievement of long-term results. However, I also show that, in contrast to the common wisdom, soft bankruptcy can lead to the choice of investments that are biased towards the achievement of short-term outcomes.

Suggested Citation

  • Tarantino, Emanuele, 2013. "Bankruptcy law and corporate investment decisions," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2490-2500.
  • Handle: RePEc:eee:jbfina:v:37:y:2013:i:7:p:2490-2500
    DOI: 10.1016/j.jbankfin.2013.02.007
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    3. Lei Chen & Zhi Jin & Yongqiang Ma & Hui Xu, 2019. "Confucianism, openness to the West, and corporate investment efficiency," European Financial Management, European Financial Management Association, vol. 25(3), pages 554-590, June.

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    More about this item

    Keywords

    Bankruptcy law; Financial contracts; Limited commitment; Soft budget constraint; Short-termism;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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