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Insolvency Resolution and the Missing High Yield Bond Markets

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  • Bo Becker
  • Jens Josephson

Abstract

In many countries, bankruptcy is associated with low recovery by creditors. We develop a model of corporate credit markets in such an environment. Corporate credit is provided by either a bond market or risk-averse banks. Restructuring of insolvent firms happens out of court if in-court bankruptcy is inefficient, giving banks an advantage over bondholders. Riskier borrowers will use bank loans anywhere, but also bonds when bankruptcy is efficient. The model matches empirical debt mix patterns better than fixed-issuance-cost models. Across systems, efficient bankruptcy should be associated with more bond issuance by high-risk borrowers. This effect is small or absent for safe firms. We find that both predictions hold both cross-country and using insolvency reforms as natural experiments. Our empirical estimates suggest that a one-standard-deviation increase in the efficiency of bankruptcy is associated with an increase in the stock of corporate bonds equal to 5% of firm assets. This is equivalent to two thirds of the difference between the US and other countries.

Suggested Citation

  • Bo Becker & Jens Josephson, 2013. "Insolvency Resolution and the Missing High Yield Bond Markets," NBER Working Papers 19415, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:19415
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    Cited by:

    1. Julian Neira, 2015. "Bankruptcy and Cross-Country Differences in Productivity," Discussion Papers 1511, Exeter University, Department of Economics.
    2. Elert, Niklas & Henrekson, Magnus & Stenkula, Mikael, 2017. "Institutional Reform for Innovation and Entrepreneurship: An Agenda for Europe," Working Paper Series 1150, Research Institute of Industrial Economics, revised 16 Feb 2017.

    More about this item

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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