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

by Sergei A. Davydenko of the University of Toronto, and
Julian R. Franks of the London Business School

June 2007

Abstract: Using a sample of small firms that defaulted on their bank debt in France, Germany, and the U.K., 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.

JEL Classification: G21, G30, G33.

Keywords: Default, Reorganization, Bankruptcy code, Recovery rate.

Published in: Journal of Finance, Vol. 63, No. 2, (April 2008), pp. 565-608.

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