Bankruptcy Law Reforms and Enforcement: consequences on Bank Credit for SMEs

Marco Ghitti, PhD

Abstract :

“Great Expectations” or “Side Effects”? Bankruptcy Law Reforms and Bank Credit for SMEs: A series of Italian Bankruptcy Law reforms, aiming to facilitate debt renegotiation and business continuation, allows us to disentangle how a change of creditor rights affects Bank Credit Market for SMEs. We exploit a new credit level dataset on bank credit, with more than 6.4 million pooled observations. By constructing a new Creditor Rights Index across all bankruptcy proceedings available for SMEs, we find that reforms weakening creditor rights increase interest rates and reduce amount of credit available, causing credit rationing. Consequences of reforms are not equally distributed, but are stronger for riskier firms and unsecured credits. Results highlight that regulators’ decisions may have unintended consequences.

When Courts meet the Law: Consequences of Bankruptcy Law Enforcement on Bank Credit for SMEs: Enforcement risk is a key friction in financial markets. We document this point with reference to the Bank Credit Market for SMEs. We exploit variation in the duration of bankruptcy proceedings across courts in Italy, together with a series of Bankruptcy Law reforms, to shed light on the impacts of enforcement quality on firms’ financing conditions. Taking advantage of a new credit level dataset on bank credit, with 6.4 million pooled observation, we find that court (in)efficiency amplifies the effects of the reforms. When creditor rights shrink, SMEs operating in less efficient judicial districts experience a larger contraction of credit volumes, causing credit rationing, as well as a stronger rise of bank lending rates. Effects are not equally distributed, but are stronger for riskier, unsecured and new credits. Findings show that even reforms originally aimed to facilitate access to credit may have opposite consequences, which enforcement quality exacerbates.

Publication date of the thesis

Thesis committee

Supervisor: Florencio Lopez-de-Silanes, EDHEC Business School

External reviewer: Erasmo Giambona, University of Amsterdam

Other committee member: Abraham Lioui, EDHEC Business School