Creditor Rights, Debt Capacity and Securities Issuance: Evidence from Anti-Recharacterization Laws

This paper examines the effects of improvement in creditors’ rights protection on firms’ financing choices and securities issuance. To address these issues, I exploit exogenous variation in creditors’ rights protection induced by the staggered adoption of anti-recharacterization laws by some U.S. states. The laws enhance the ability of creditors to repossess collateral during bankruptcy. Using a difference-in-difference methodology to estimate the causal impacts, I find that: [1] the laws are positively related to debt capacity and debt maturity. Firms increase market leverage and substitute away from costly short-term debt financing into long-term debt financing [2] the laws are positively related to debt issuance [3] the laws are negatively related to equity issuance. My analysis further demonstrates that proactive securities issuers are significantly more responsive to the adoption of anti-recharacterization laws than passive securities issuers.