Do Bankruptcy Codes Matter? A Study of Defaults in France, Germany, and the UK

Using a large sample of small-to-medium size firms that defaulted on their bank debt in France, Germany, and the UK, we find that large differences in creditors' rights across countries lead banks to adjust their lending and reorganization practices to mitigate the expected creditor-unfriendly aspects of the bankruptcy law. In particular, French banks respond to a creditor-unfriendly code by requiring more collateral than lenders elsewhere, and by relying on particular collateral forms that minimize the statutory dilution of their claims in bankruptcy. Despite such adjustments, bank recovery rates in default remain sharply different across the three countries, reflecting different levels of creditor protection. Notwithstanding the high level of creditor protection and low expected losses from default, pre-distress loan spreads in the UK are not lower than elsewhere. We conclude that, despite significant adjustments in lending practices, bankruptcy codes still sharply affect default outcomes.