Collateral after the Brazilian Creditor Rights Reform

This study investigates how the strengthening of creditor rights affected corporate debt structure, collateral liquidity, and collateralization rate following the 2005 bankruptcy law in Brazil. Using a large dataset from the Brazilian credit registry, it was found that secured debt usage increased 13 percentage points after the reform, together with a reinforcement in the use of more liquid collateral agreements. It proved that the law had a varying effect across groups of borrowers with different amounts of collateral pledged before the reform. Firms previously pledging amounts of collateral in excess of the value of the loan could access credit with a much lower collateralization rate after the introduction of the law. However, the collateralization rate significantly increased for firms with lower-pledge levels, imposing an extra cost on them. The study showed that a multiple banking set-up may give such borrowers an option out of overcollateralization, as foreign-owned banks demanded substantially less collateral compared with domestic-owned banks after the reform. The results are robust after applying a wide variety of control tests.