In 2011, German legislators passed the latest reform to German Insolvency Law (ESUG). ESUG mandates that creditors of larger firms can exert more influence on the appointment of the insolvency administrator, resulting in a shift of power from shareholders to creditors. Based on difference-in-differences estimation, we find that larger firms reduced financial leverage by about 4–7 percentage points relative to control firms. Furthermore, after the enactment of ESUG, larger firms spend less money on investment and pay higher interest rates. Overall, the evidence is consistent with the view that German creditor protection has become too strong.

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Keywords Agency, Bankruptcy, Insolvency, Leverage, Theory
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Journal Journal of Corporate Finance
Closset, F. (Frédéric), & Urban, D. (Daniel). (2019). The balance of power between creditors and the firm: Evidence from German insolvency law. Journal of Corporate Finance, 58, 454–477. doi:10.1016/j.jcorpfin.2019.06.004