Do Country-level Creditor Protections Affect Firm-level Debt Structure?

We study the effects of country-level creditor protections on the firm-level choice of debt structure. Using data from 46 countries, we show that firms have more concentrated debt structures in countries with stronger creditor protection. Firms choose debt structure concentrations by trading-off between the probability of a strategic default against an inefficient liquidation by creditors. In countries with strong creditor protections, managers are less likely to strategically default thus the trade-off shifts toward preventing inefficient liquidation. Firms, therefore, choose more concentrated debt structures to facilitate coordination among creditors thereby reduce the probability of inefficient liquidation. Firms with ex-ante higher bankruptcy costs, including those with more intangible assets and higher cash-flow volatilities, exhibit stronger effects. A difference-in-differences analysis of firms' debt structure responses to creditor rights reforms confirms the cross-country results. Our findings are robust to alternative settings and a battery of robustness checks