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Conditional Control: The Consequences of Expanding Creditors’ Right to Initiate Bankruptcy

Author

Listed:
  • Yafeh, Yishay
  • Hamdani, Assaf
  • Mugerman, Yevgeny
  • Rooz, Ruth
  • Steinberg, Nadav

Abstract

We study the effects of a court decision granting creditors the power to force into bankruptcy corporate debtors whose liabilities exceed their assets even if they are current on their payments. We find that bond (stock) prices responded positively (negatively) to the court ruling and that firms affected by it did not reduce their risk, but increased their net worth through equity injections and aggressive accounting. As a result, the informativeness of these firms’ financial reports decreased. We conclude that the benefits from some measures of creditor empowerment may be mitigated by borrowers’ incentives to present overly-optimistic financial reports.

Suggested Citation

  • Yafeh, Yishay & Hamdani, Assaf & Mugerman, Yevgeny & Rooz, Ruth & Steinberg, Nadav, 2021. "Conditional Control: The Consequences of Expanding Creditors’ Right to Initiate Bankruptcy," CEPR Discussion Papers 16844, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16844
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    More about this item

    Keywords

    Bankruptcy; Creditor rights; Financial distress; Informativeness; Aggressive accounting;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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