Bankruptcy Reforms and Corporate Debt Structure

A growing number of jurisdictions have adopted bankruptcy law reforms to aid debt restructuring. By utilizing a difference-in-differences model based on bankruptcy law reforms across six economically advanced jurisdictions, we discover that firms adopt more diversified debt instruments following the law reforms. This impact is predominantly observed in firms that are more vulnerable to a potential tightening of credit supply due to the law reforms. Such firms also decrease their overall debt borrowing and investment. Moreover, we find that affected firms rely less on secured debt, aligning with the idea that these legal reforms diminish the protection of secured creditors. Our findings also indicate that borrowing costs rise and debt maturities shorten after the reforms, implying that creditors may adjust debt contract terms to counterbalance the reduced legal protection. Overall, our analysis suggests that bankruptcy law reforms promoting debt restructuring could potentially negatively impact credit supply and impede the debt financing of some types of firms