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Bankruptcy law and bank financing

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  • Rodano, Giacomo
  • Serrano-Velarde, Nicolas
  • Tarantino, Emanuele

Abstract

Exploiting the timing of the 2005–2006 Italian bankruptcy law reforms, we disentangle the effects of reorganization and liquidation in bankruptcy on bank financing and firm investment. A 2005 reform introduces reorganization procedures facilitating loan renegotiation. The 2006 reform subsequently strengthens creditor rights in liquidation. The first reform increases interest rates and reduces investment. The second reform reduces interest rates and spurs investment. Our results highlight the importance of identifying the distinct effects of liquidation and reorganization, as these procedures differently address the tension in bankruptcy law between the continuation of viable businesses and the preservation of repayment incentives.

Suggested Citation

  • Rodano, Giacomo & Serrano-Velarde, Nicolas & Tarantino, Emanuele, 2016. "Bankruptcy law and bank financing," Journal of Financial Economics, Elsevier, vol. 120(2), pages 363-382.
  • Handle: RePEc:eee:jfinec:v:120:y:2016:i:2:p:363-382
    DOI: 10.1016/j.jfineco.2016.01.016
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    More about this item

    Keywords

    Financial distress; Financial contracting; Renegotiation; Multi-bank borrowing; Bankruptcy courts;
    All these keywords.

    JEL classification:

    • 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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