Bankruptcy Law and Financial Contracting: The Impact of the Italian 2005/2006 Bankruptcy Law Reform on the Cost of Finance of Firms

We analyze the impact of the 2005 Italian bankruptcy law reform on financial contracts signed between manufacturing firms and banks: do bankruptcy codes impact on contracting terms of loans at origination? This article answers this important question by combining a unique Italian loan level dataset and by exploiting a quasi-natural experiment associated to the reform. We find that the new design of the liquidation procedure reduced significantly the cost of debt financing. Conversely, we find that the stronger power given by law to entrepreneurs to renegotiate the terms of financial contracts increased the the cost of debt financing.