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The impact of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 repo ‘safe harbor’ provisions on investors

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  • Justin Chircop
  • Michele Fabrizi
  • Antonio Parbonetti

Abstract

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 significantly expanded the exemptions from the normal workings of the U.S. Bankruptcy Code. Using a large sample of U.S. banks, we study investors’ reaction to news about the promulgation of the BAPCPA repo ‘safe harbor’ provisions and the influence extending such exemptions to repos collateralized by riskier collateral had on equity market information asymmetry. We find a negative market reaction to news events about the promulgation of BAPCPA, which subsequent cross-sectional analysis suggests is at least partly driven by repo exposure. This finding suggests that investors perceived the increase in finance risk from the extension of the ‘safe harbor’ provisions as dominating the perceived gain from accessing cheaper finance. Further, we find that the promulgation of BAPCPA gave rise to increased information asymmetry for banks with repo exposure.

Suggested Citation

  • Justin Chircop & Michele Fabrizi & Antonio Parbonetti, 2018. "The impact of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 repo ‘safe harbor’ provisions on investors," The European Journal of Finance, Taylor & Francis Journals, vol. 24(18), pages 1772-1798, December.
    • Handle: RePEc:taf:eurjfi:v:24:y:2018:i:18:p:1772-1798
    DOI: 10.1080/1351847X.2018.1427608
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    Cited by:

    1. Lewis, Brittany Almquist, 2023. "Creditor rights, collateral reuse, and credit supply," Journal of Financial Economics, Elsevier, vol. 149(3), pages 451-472.
    2. Cai, Chengyou & Wang, Xingchun & Yu, Baimin, 2024. "Pricing vulnerable spread options with liquidity risk under Lévy processes," The North American Journal of Economics and Finance, Elsevier, vol. 72(C).

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