Corporate Finance: Bankruptcy and Distress
Paper Session
Saturday, Jan. 6, 2024 2:30 PM - 4:30 PM (CST)
- Chair: Dalida Kadyrzhanova, Federal Reserve Board
Resolving Financial Distress Where Property Rights are not Clearly Defined: The Case of China
Abstract
We use data on financially distressed Chinese companies in order to study a debt market where property rights are crudely defined and poorly enforced. To help with identification we use an event where a business-friendly province published new guidelines regarding the administration and enforcement of assets pledged as collateral. Although by no means a comprehensive reform of bankruptcy law or property rights, by instructing courts to enforce existing, albeit rudimentary, contractual rights the new guidelines virtually have significant impacts over borrowers. In particular, we find that for those titled borrowers, due to better enforced priority among creditors, are associated with significant increase in loan from secured creditors and decrease in loan from exploitative loan sharks, leading to debt concentration toward senior creditors. The better enforced priority also discouraged creditors from demanding early repayment and therefore eliminated creditor runs, increasing the likelihood of financially distressed companies surviving and reducing the probability of owners fleeing due to fear of violent collection by private loan sharks. We did not observe similar results in the control group of untitled borrowers or among borrowers located outside the jurisdiction of the reform. These changes illustrate how piecemeal reforms of property rights and their enforcement may have a significant impact on economic outcomes. Our analysis and results challenge the view that a fully fledged system of private property is a precondition for economic development.After the Storm: Direct and Spillover Benefits from Disaster Loans to Small Businesses
Abstract
The increasing frequency and severity of natural disasters creates new imperatives to identify efficient and effective policies to aid recovery in the aftermath. One of the largest and longest running such programs globally is the U.S. disaster loan program, which offers businesses loans to repair physical damage following a disaster. This rapid injection of capital could catalyze firm survival and growth, with implications for the local community. However, more debt might not be helpful: The loans increase firm risk and come with an interest burden, could prop up ``zombie'' firms that should exit, and may crowd out private capital. We evaluate the causal effect of disaster loans using comprehensive administrative data tied to both financial and real outcomes between 2004 and 2020. Receiving a disaster loan has strong and persistent positive effects, reducing the chances of firm exit and increasing employment and revenue. The loans unlock additional, non-SBA private credit while also reducing delinquency and bankruptcy. The loans are more useful for firms and places that are more constrained and have more vulnerable populations. Finally, we find evidence of positive spillovers on the firm entry margin, but suggestive evidence of negative spillovers on incumbent neighbor firms. Overall, the loans appear to strongly benefit recipient firms and likely benefit the local economy as well.Discussant(s)
Arthur Taburet
,
Duke University
Jacopo Ponticelli
,
Northwestern University
Raymond Kluender
,
Harvard University
JEL Classifications
- G3 - Corporate Finance and Governance