Do Bankruptcy Codes Matter? A Study of Defaults in France, Germany, and the U.K.




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      Sergei Davydenko is at Joseph L. Rotman School of Management, University of Toronto. Julian Franks is at London Business School and the Centre for Economic Policy Research. This study has been made possible through the initiative and continuous support of Standard and Poor's Risk Solutions. We thank the 10 banks in France, Germany, and the United Kingdom, which wish to remain anonymous, for providing us with the data and for their cooperation throughout. We are deeply indebted to Arnaud de Servigny, Michael Baker, Antje Brunner, Régis Blazy, and the numerous officers of the 10 banks for their collective effort to make the data available. Earlier collaboration with Oren Sussman was very helpful in the design of data collection. We gratefully acknowledge helpful comments from Viral Acharya, Ken Ayotte, Ian Cooper, Fritz Foley, Francisco Gomes, Gerard Hertig, Kose John, Roger Stein, Ilya Strebulaev, Alois Stutzer, an anonymous referee, and participants at the American Finance Association Philadelphia meetings, Western Finance Association Portland meetings, European Finance Association Moscow meetings, 2005 NBER Corporate Finance meetings, Moody's/LBS II Credit Risk Conference, the ETH Zürich Workshop in Law & Economics, and the seminars at the Bank of England, Boston College, London Business School, and University of Strasbourg.


Using a sample of small firms that defaulted on their bank debt in France, Germany, and the United Kingdom, we find that large differences in creditors' rights across countries lead banks to adjust their lending and reorganization practices to mitigate costly aspects of bankruptcy law. In particular, French banks respond to a creditor-unfriendly code by requiring more collateral than lenders elsewhere, and by relying on collateral forms that minimize the statutory dilution of their claims in bankruptcy. Despite such adjustments, bank recovery rates in default remain sharply different across the three countries, reflecting very different levels of creditor protection.