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CFGE-18: Bankruptcy and uncertainty
The Dark Side of 2005 Bankruptcy Code Reform —Does Derivatives Privilege Affect Corporate Borrowing?
1City University of Hong Kong, Hong Kong S.A.R. (China); 2Shanghai University of Economics and Finance; 3Chinese University of Hong Kong
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.
It’s Not So Bad: Director Bankruptcy Experience and Corporate Risk Taking
1Washington University in St. Louis, United States of America; 2Indiana University, United States of America
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.
Uncertainty, Access to Debt, and Firm Precautionary Behavior
1Federal Reserve Board; 2Indiana University; 3Stockholm School of Economics
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.
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