UC Berkeley

The aim of my research is to understand how firms alter their debt structure and accounting policy in response to strengthening some creditors' rights. To this end, I examine the impact of the Anti-recharacterization law, which enhances the rights of securitization creditors, on firms' debt concentration and financial reporting. By considering the conflict of interest between creditors during bankruptcy, I find that the legal reform leads firms to concentrate their debt structure (e.g., by using fewer types of debt or contracting with fewer creditors) in order to mitigate creditors' coordination costs in bankruptcy. This effect is more pronounced for firms experiencing financial distress, with low re-deployable assets, poor disclosure quality, and high accounts receivable. Additionally, firms' financial reporting becomes more conservative after the reform in an effort to compensate other creditors and improve their chances of recovering their claims to prevent coordination failure in bankruptcy. This effect is more pronounced for firms in financial distress, with high re-deployable assets, and high accounts receivable. Overall, my results highlight how firms attempt to mitigate the risk of creditors' coordination failure in bankruptcy.