Presenter: Martin Kornejew, University of Bonn

Title: Insiders v. Outsiders: Market Creditor Protection, Finance and Investment

Abstract: Market-based lending plays a key role in credit intermediation. But legal protection of dispersed market creditors disciplines management at the risk of complicating debt restructuring. In theory, such protection has ambiguous but possibly large consequences for firms’ financing and investment. I estimate the effects of a US court ruling which protected bond market creditors against coercive exchange offers: After the ruling, distressed firms were forced to restructure bond market debt in bankruptcy more frequently. Healthy firms responded by cutting bond issuance and investment. Direction and magnitude of reactions indicate that over-protecting dispersed creditors can choke public credit markets, with adverse real effects.

Host: Thomas Kokholm