Essays on credit and bankruptcy law

• Autor(a) principal: Funchal, Bruno
• Data de Publicação: 2006
• Tipo de documento: Tese
• Idioma: eng
• Título da fonte: Repositório Institucional do FGV (FGV Repositório Digital)
• Texto Completo: https://hdl.handle.net/10438/1610
• topic: Economia; Falência; Direito e economia; Créditos

This thesis is composed of four papers referent to the subject of Credit and Bankruptcy Law. In each essay - that corresponds to one chapter - we aim at analyzing the influence of default on credit market, considering different legal situations. In the first chapter we studied the costs of informational failures, as moral hazard, on Brazilian credit market. To measure this effect, we used the recently approved law that regulates payroll loans. The payroll loan is a type of personal credit with repayments directly deducted from the borrowers’ payroll check, which, in practice, makes a collateral out of future income. Taking advantage of this experiment our objective was to identify the average effect of the new law on personal credit, using the difference-in-difference procedure, and accounting for general-equilibrium effects. Also, we verified both the direct and indirect effects of the new law (the partial equilibrium effects). Our results indicates that, the new law is associated with an increase of the volume of new personal loans and a reduction in its interest rates, which indicates that the costs generated by information failures is highly significant for the personal credit market. For the institutions directly effected the same results are observed, but stronger. Financial institutions that were not directly affected also suffered, in some way, an impact with the implementation of the new law. In this case, however, we notice a reduction in the volume of the new personal loans, which represents a migration of agents from financial institutions that are not able to offer payroll loans to institutions that are allowed to do that. Also, in the same direction of directly affected financial institutions, a reduction in the interest rate for personal loans was observed. The explanation for this result comes from the fact that the demand for credit decreases for such institutions due to the migration of their clients to institutions benefited with the new law. 2 The chapter 2 continues our study on individuals, but now we use the U.S. Personal Bankruptcy Law to study the effect of creditors’ protection on credit markets development. The conventional wisdom argues that creditor protection through the legal system is associated with a broader credit market in a monotone way, or simply the higher the protection to creditors the better is to the credit market. In this essay we analyze if this finding is still true if the creditors’ protection is directly determined by the debtors’ punishment. Taking advantage of the heterogeneity between U.S. states provided by a specific issue of the Personal Bankruptcy Law, called bankruptcy exemptions (which determines the creditors’ protection), we show that if the creditors’ protection is directly determined by the debtors’ punishment, the results highlighted by the current literature doesn’t hold any more. In fact, there will be a non-monotonic relationship between the creditors’ protection (or debtors’ punishment) and the size of the credit market, where an intermediate level of protection is optimal for the development of such market. In the chapters 3 and 4 our focus changes to corporations. The chapter 3 studies the corporate bankruptcy law in Latin America, focusing on the Brazilian reform. We use a simple model to examine the economic incentives associated with several aspects of bankruptcy laws and insolvency procedures, as well as the trade-offs involved, showing how changes in the system could affect a firm’s investment, effort, and other choices. Then, we compare bankruptcy procedures across groups of countries, and test empirically the effects of the quality of bankruptcy law. Finally, we studied the recent Brazilian bankruptcy reform, analyzing its main components and possible effects on credit markets. At last, the chapter 4 also dresses a question about the corporative bankruptcy law. In this essay, our main challenge was to explore the best bankruptcy procedure considering two important cross-country differences: the industry sector characteristic (like the physical capital intensity of each industry sector and its share in the economy) and the costs - direct and indirect - of the bankruptcy procedure. When lawmakers design a bankruptcy law that is best for their specific economy, they cannot just resort to existing theories in economi 3 and corporate finance because countries differ in their economic environments and usually, these theories do not capture such cross-country differences. Understanding these differences, we can search the best bankruptcy law for particular countries. The theoretical framework was drawn upon the general equilibrium framework with incomplete markets and default. Simulating it for a range of parameters that describe the characteristics of the countries (bankruptcy costs and industry sectors) we proposed the best Corporate Bankruptcy Law for a sample of 44 countries.