- Bankruptcy •
- private benefits of control •
- investment •
- law and economics
We examine how creditor protection affects ﬁrms with different levels of owners’ and managers’ personal costs of bankruptcy.
Theoretically, we show that ﬁrms with high personal costs of bankruptcy borrow and invest more under a more debtor-friendly management stay system, whereas ﬁrms with low personal costs of bankruptcy borrow and invest more under a more creditor-friendly receivership system. Intuitively, stronger creditor protection relaxes ﬁnancial constraints but reduces credit demand. Which effect dominates depends on owners’ andmanagers’ personal costs of bankruptcy. Empirically, we ﬁnd support for these predictions using a Korean bankruptcy reform, which replaced receivership with management stay.