Do bankruptcy codes matter?
A study of defaults in France, Germany, and the UK
Sergei A. Davydenko, Julian R. Franks
May 1, 2005
This paper studies how bankruptcy codes and creditorsâ€™ rights affect distressed reorganizations in different countries. Using a sample of 2280 small firms that defaulted on their bank debt in France, Germany and the UK, we find that large differences in creditorsâ€™ rights across countries lead banks to adjust their lending and reorganization practices to mitigate the expected creditor-unfriendly aspects of bankruptcy law. In particular, French banks respond to a creditor-unfriendly bankruptcy code by requiring more collateral than lenders elsewhere, and by relying on particular collateral forms that minimize the statutory dilution of their claims in bankruptcy. Despite such adjustments, bank recovery rates in default differ substantially across the three countries, with medians of 92% in the UK, 67% in Germany, and 56% in France. Notwithstanding the low level of creditor protection, low recovery rates, and high historical bankruptcy rates in France, we find that pre-distress loan spreads there are similar to those found in the creditor-friendly UK. We conclude that, despite significant adjustments in lending practices, bankruptcy codes still sharply affect default outcomes.