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Debtor-in-possession financing and credit priority: the effects of the preferential status granted by law in a composition with creditors

Author

Listed:
  • Elisa Brodi

    (Bank of Italy)

  • Luca Casolaro

    (Bank of Italy)

Abstract

The work evaluates from a legal and economic perspective a number of provisions designed to promote debtor-in-possession financing to firms involved in a composition with creditors (concordato preventivo). Since 2010, several reforms have progressively extended the scope of preferential status for such credits. The research focuses on loans granted by professional lenders to firms whose composition plans were approved by the courts between 2006 and 2014. The econometric analysis shows that the measures have reduced the credit restriction (by 2 percentage points) and lowered its cost (with interest rates falling on average by 40 basis points). This outcome is mostly due to the liquidity provided by lenders that were not previously exposed to the distressed firm. However, some legal obstacles � such as, for instance, the possibility of the preferential status being reversed if a bankruptcy proceeding is initiated � could prevent further funds from being provided.

Suggested Citation

  • Elisa Brodi & Luca Casolaro, 2017. "Debtor-in-possession financing and credit priority: the effects of the preferential status granted by law in a composition with creditors," Questioni di Economia e Finanza (Occasional Papers) 387, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_387_17
    as

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    File URL: https://www.bancaditalia.it/pubblicazioni/qef/2017-0387/QEF_387_17.pdf
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    References listed on IDEAS

    as
    1. Edward R. Morrison, 2007. "Bankruptcy Decision Making: An Empirical Study of Continuation Bias in Small-Business Bankruptcies," Journal of Law and Economics, University of Chicago Press, vol. 50(2), pages 381-419.
    2. Wolfgang Bergthaler & Kenneth H Kang & Yan Liu & Dermot Monaghan, 2015. "Tackling Small and Medium Enterprise Problem Loans in Europe," IMF Staff Discussion Notes 15/04, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    composition with creditors; credit; public policy evaluation; business crisis; credit priority;
    All these keywords.

    JEL classification:

    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • 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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