Corporate Restructuring and Creditor Power: Evidence from European Insolvency Law Reforms

Abstract

In an attempt to match US bankruptcy law, many European countries have reformed their insolvency laws towards a regime that fosters corporate restructuring. This paper evaluates the implications of these reforms. Based on a staggered difference-in-differences analysis around eight insolvency reforms in 15 European countries, this paper finds a relative increase in the cost of debt by about 50 bps in countries with such a reform. The effect is more pronounced among firms being closer to default. As a result of increased cost of debt financing, firms cut investment and employee pay by about 2 percent. Overall, the results are consistent with the view that creditors may be negatively affected by insolvency law reforms oriented towards restructuring and, thus, demand higher risk premia.