Do Country-Level Creditor Protections Affect Firm-Level Debt Structure Concentration?

Abstract

AbstractWe study the effects of country-level creditor protections on the firm-level choice of debt structure concentration. Using data from forty-six countries, we show that firms form more concentrated debt structures in countries with stronger creditor protection. We propose a trade-off framework of optimal debt structure and show that in strong creditor rights regimes, the benefit of forming concentrated structures outweighs its cost. Because strong creditor protections increase liquidation bias, firms choose concentrated debt structures to improve the probability of successful distressed debt renegotiations. Firms with ex ante higher bankruptcy costs, including those with higher intangibility, cash flow volatility, R&D expenses, and leverage, exhibit stronger effects. Firms with restricted access to capital are also affected more. A difference-in-differences analysis of firms’ debt structure responses to creditor rights reforms confirms the cross-country results. Our findings are robust to alternative settings and a battery of robustness checks.