Journal Article

Bankruptcy Codes and Innovation

Viral V. Acharya and Krishnamurthy V. Subramanian

in The Review of Financial Studies

Published on behalf of The Society for Financial Studies

Volume 22, issue 12, pages 4949-4988
Published in print December 2009 | ISSN: 0893-9454
Published online April 2009 | e-ISSN: 1465-7368 | DOI: http://dx.doi.org/10.1093/rfs/hhp019
Bankruptcy Codes and Innovation

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  • Corporate Governance
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We argue that when bankruptcy code is creditor friendly, excessive liquidations cause levered firms to shun innovation, whereas by promoting continuation upon failure, a debtor-friendly code induces greater innovation. We provide empirical support for this claim by employing patents as a proxy for innovation. Using time-series changes within a country and cross-country variation in creditor rights, we confirm that a creditor-friendly code leads to a lower absolute level of innovation by firms, as well as relatively lower innovation by firms in technologically innovative industries. When creditor rights are stronger, technologically innovative industries employ relatively less leverage and grow disproportionately slower.

Keywords: G3; K2; O3; O4; O5

Journal Article.  18323 words.  Illustrated.

Subjects: Corporate Governance ; Law and Economics ; Technological Change; Research and Development ; Economic Growth and Aggregate Productivity ; Economywide Country Studies

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