Creditor- vs. debtor-friendly environment, does it matter?

Creditor rights protection has often been heralded as fostering financial and economic development. Recent research questions this, showing that more creditor-friendly bankruptcy systems result in inefficiently low innovation levels in industries that need it most.

A graphic illustration comparing debtor-friendly U.S. and creditor-friendly Germany drives the point home, showing the large degree of innovation in the U.S. in biotechnology, computing and medical instruments, while Germany seems to have the innovative edge in the textile and apparel industry (graph shows the ratio of patents in computing relative to patents in textile industry).

 

But do not get carried away! It turns out that firms that are randomly assigned a more debtor-friendly judge in a U.S. district court after filing for chapter 11 reorganization are less likely to survive, more likely to re-file for chapter 11 in later years and grow more slowly.

So judicial bias towards debtors in an already debtor-friendly bankruptcy system can hurt a company's prospects.