Firms' capital structure and the bankruptcy law design

Abstract

Purpose

The purpose of this paper is to study the effect of changes in creditors' priority defined by the bankruptcy law on firms' capital structure.

Design/methodology/approach

Taking advantage of the Brazilian bankruptcy law reform as an experiment and using publicly traded firms' balance sheet data, it compares Brazilian firms capital structure before and after the new law, using fixed‐effects panel regression. The empirical results are in line with theories that predict the effects on the capital structure due to changes in creditors' expectations.

Findings

This paper finds evidence of an increase in the debt portion of the capital structure.

Originality/value

The paper contributes the law and finance empirical literature, pointing out that change in creditors' protection induces significant changes in the firms' financing policy.

Citation

Funchal, B. and Clovis, M. (2009), "Firms' capital structure and the bankruptcy law design", Journal of Financial Economic Policy, Vol. 1 No. 3, pp. 264-275. https://doi.org/10.1108/17576380911041737