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Bankruptcy law and firm size

Author

Listed:
  • Canipek, Aras
  • Kind, Axel
  • Litov, Lubomir
  • Trešl, Jiří

Abstract

Weaker creditor rights can increase credit costs and thus prompt firms to reduce debt and investment. Yet, they can reduce distress costs and thus allow firms to increase leverage and eliminate risk-reducing but unprofitable investments. We hypothesize that firm size influences the effect of creditor rights on credit costs and distress costs and thus which effect dominates. Weaker creditor rights should have a negative effect for small firms but a positive effect for large firms. Using a German bankruptcy reform, we find support for our hypothesis. Our findings reconcile mixed evidence and have important implications for optimal bankruptcy design.

Suggested Citation

  • Canipek, Aras & Kind, Axel & Litov, Lubomir & Trešl, Jiří, 2026. "Bankruptcy law and firm size," SAFE Working Paper Series 489, Leibniz Institute for Financial Research SAFE.
    • Handle: RePEc:zbw:safewp:343060
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    References listed on IDEAS

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    Cited by:

    1. Canipek, Aras, 2026. "Bankruptcy law penalties and board independence," SAFE Working Paper Series 488, Leibniz Institute for Financial Research SAFE.

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    Keywords

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    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • 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
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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