Insolvency regimes and firms' default risk under economic uncertainty and shocks |
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Affiliation: | 1. Finance, Accounting, and Control Area, Indian Institute of Management Kozhikode, Kerala, India;2. Economics Area, Indian Institute of Management Ahmedabad, Gujarat, India;1. Department of Financial Engineering, Ajou University, Suwon, 16499, Republic of Korea;2. Department of Applied Mathematics & Institute of Natural Science, Kyung Hee University, Yongin, 17104, Republic of Korea;3. Department of Mathematical Sciences, Seoul National University, Seoul, 08826, Republic of Korea;1. Department of Management, Università Politecnica delle Marche, Ancona, Italy;2. Department of Economics and Social Science, Università Politecnica delle Marche, Ancona, Italy;1. Graduate School of Economics, Kobe University, 2-1 Rokko-dai, Nada, Kobe, 657-8501, Japan;2. Institute of Social and Economic Research, Osaka University, 6-1, Mihogaoka, Ibaraki, Osaka, 567-0047, Japan;1. Faculty of Economics, Fukuoka University, 8-19-1, Nanakuma, Jonan-ku, Fukuoka, 814-0180, Japan;2. Faculty of International Politics and Economics, Nishogakusha University, 6-16 Sanbancho, Chiyoda-ku, Tokyo, 102-8336, Japan |
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Abstract: | One of the arguments often advanced for implementing a stronger insolvency and bankruptcy framework is that it enhances credit discipline among firms. Using a large cross-country firm-level dataset, we empirically test whether a stronger insolvency regime reduces firms' likelihood of defaulting on their debt. In particular, we examine whether it reduces default risk during increased economic uncertainty and various external shocks. Our results confirm that a stronger insolvency regime moderates the adverse effects of economic shocks on firms' default risk. The effects are more pronounced for firms in the top half of the size distribution. We also explore channels through which improved creditor rights influence firms' default risk, including dependence on external finance, corporate leverage, and managerial ethics. Our main results are robust to an alternative measure of default risk, inclusion of currency and sovereign debt crisis episodes, and alternative estimations. |
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Keywords: | Insolvency Bankruptcy Default risk Economic policy uncertainty Sovereign debt crisis Currency crisis G30 G32 G33 |
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