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Session Overview
CFGE-18: Bankruptcy and uncertainty
Saturday, 24/Aug/2019:
11:00 - 12:30

Session Chair: Carola Schenone, University of Virginia
Location: D -110

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The Dark Side of 2005 Bankruptcy Code Reform —Does Derivatives Privilege Affect Corporate Borrowing?

Maggie Hu3, Chenyu Shan2, Rui Zhu1

1City University of Hong Kong, Hong Kong S.A.R. (China); 2Shanghai University of Economics and Finance; 3Chinese University of Hong Kong

Discussant: Tiantian Gu (Northeastern University)

The 2005 Bankruptcy Reform puts derivatives contracts into an effective “super-senior” status. Although it is intended to provide stability to the derivative markets and reduce systemic risk, we take a different perspective and examine its potential negative effect on derivative-using firms’ borrowings. The theoretical model in Bolton and Oehmke (2015) suggests that the super-seniority status of derivatives shifts risk to the creditors and could lead to inefficiency in corporate borrowing. Using a unique set of hand-collected corporate hedging data, we examine the effects of 2005 Bankruptcy Reform on firms’ borrowing capacity and cost. Our difference-in-difference tests show that derivatives users are less likely to obtain loans from banks. Even if they do, the loans they obtain have smaller size, higher loan spread and more stringent collateral requirements. The effects of derivatives usage on loan terms are more pronounced for firms closer to financial distress. The effect on bonds is similar, though weaker. Collectively, these findings shed light on the dark side of the 2005 Bankruptcy Reform and the understanding of potential conflict of interest amongst various creditors in general.

efa2019-CFGE-18-1889-The Dark Side of 2005 Bankruptcy Code Reform —Does Derivatives Privilege Affect C.pdf

It’s Not So Bad: Director Bankruptcy Experience and Corporate Risk Taking

Radhakrishnan Gopalan1, Todd Gormley1, Ankit Kalda2

1Washington University in St. Louis, United States of America; 2Indiana University, United States of America

Discussant: Xinxin Wang (UNC)

This paper examines whether directors’ experiences influence corporate policy. Using a hand-collected dataset, we document that firms begin taking more risks when one of their directors experiences a corporate bankruptcy at another firm where they concurrently serve as a director. This increase is concentrated among directors experiencing shorter, less-costly bankruptcies, which also tend to not negatively affect directors’ careers. The findings suggest directors, on average, lower their estimate of distress costs after experiencing a bankruptcy first-hand. Our findings also suggest that directors, particularly non-independent directors, influence firm policies not only in their monitoring role but also in their advisory capacity.

efa2019-CFGE-18-760-It’s Not So Bad.pdf

Uncertainty, Access to Debt, and Firm Precautionary Behavior

Giovanni Favara1, Janet Gao2, Mariassunta Giannetti3

1Federal Reserve Board; 2Indiana University; 3Stockholm School of Economics

Discussant: Elena Pikulina (University of British Columbia)

Uncertainty affects corporate policies and the real economy, but little is known on whether financial factors influence firms’ vulnerability to uncertainty shocks. This paper shows that facilitating access to debt markets mitigates the effects of uncertainty on corporate policies. We use the staggered introduction of anti-recharacterization laws in U.S. states—which strengthened creditors’ rights to repossess collateral pledged in SPVs—to identify firms’ improved access to debt markets. After the passage of the laws, firms that face more uncertainty hoard less cash, and increase leverage, and investment in intangible assets. We show that firms’ vulnerability to uncertainty shocks is reduced by the enhanced ability to issue debt through SPVs.

efa2019-CFGE-18-549-Uncertainty, Access to Debt, and Firm Precautionary Behavior.pdf

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