Cross-Country Variations in Capital Structures: The Role of Bankruptcy Codes

47 Pages Posted: 15 Jun 2005

See all articles by Viral V. Acharya

Viral V. Acharya

New York University (NYU) - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Kose John

New York University (NYU) - Department of Finance

Rangarajan K. Sundaram

New York University (NYU) - Department of Finance

Multiple version iconThere are 3 versions of this paper

Date Written: February 2005

Abstract

We conduct a theoretical and empirical investigation of the impact of bankruptcy codes on firms' capital-structure choices. In our theoretical framework, costs of financial distress are endogenously determined as a function of the bankruptcy code. Anticipated liquidation values emerge as the key variable in the capital structure-bankruptcy code link: among other things, the theory predicts that the difference in leverage between a debt-friendly bankruptcy code (such as the UK's) and a more equity-friendly code (such as the US's) should be a monotone function of liquidation values. We examine empirical support for the theory by comparing leverages in the US and the UK for the period 1990 to 2002. Our tests use two (inverse) proxies of liquidation values: asset-specificity of the firm, and the fraction of the firm's assets that are intangibles. We find the theory is strongly backed by the data. The results are robust to considerations such as employing net leverage (debt net of cash holdings) and controlling for other firm characteristics that affect leverage.

Keywords: Leverage, bankruptcy costs, asset-specificity, intangibles, financial distress

JEL Classification: F30, G32, G33

Suggested Citation

Acharya, Viral V. and Acharya, Viral V. and John, Kose and Sundaram, Rangarajan K., Cross-Country Variations in Capital Structures: The Role of Bankruptcy Codes (February 2005). Available at SSRN: https://ssrn.com/abstract=743131

Viral V. Acharya (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

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HOME PAGE: http://www.stern.nyu.edu/~vacharya

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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United States

Centre for Economic Policy Research (CEPR) ( email )

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Kose John

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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New York, NY 10012-1126
United States
212-998-0337 (Phone)
212-995-4233 (Fax)

Rangarajan K. Sundaram

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0308 (Phone)
212-995-4233 (Fax)

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