Essays on heterogeneous firms and corporate default

Resumen

The recent US and European financial crises have witnessed the demise of a multitude of firms in both continents, with the headlines of the newspaper filled up by the default experience of several key industrial realities. Both in the US and Europe, the policy authorities have been obligated to re-think in depth the design of their bankruptcy laws. Despite the top priority of the matter in hand, the policy makers have lacked a consistent framework able to quantify the economic impact of the bankruptcy reforms. My research enquiry enters here. In the three chapters of my thesis I investigate the phenomenon of corporate default, with a particular focus on the macroeconomic consequence of changes in the corporate bankruptcy law. Chapter 1 studies the general equilibrium implications of changes in the corporate bankruptcy law. I address this question by building and characterizing a general equilibrium firm dynamics model in which the default option replicates salient features of the U.S. Bankruptcy Code: distressed firms can voluntarily file either for liquidation (Chapter 7) or reorganization (Chapter 11). The model is consistent with several regularities on corporate bankruptcy and firm dynamics. I find that changes in the bankruptcy law design have economically significant general equilibrium effects on output, consumption and TFP, through firms’ selection. Chapter 2 documents a novel channel through which pro-creditor bankruptcy reforms can backfire. The theory arises from the observation of the fact that firms file for bankruptcy reorganization (Chapter 11) not only to restructure debt but also to restructure labour contracts. When workers extract rents, restructuring labour contracts helps distressed firms to regain economic soundness. Shareholders weigh the cost of restructuring labour contracts against their claims on the value of the firm. In this environment, bankruptcy reforms face a trade-off . A more creditor-friendly law raises recovery values of successful reorganizations. Yet, it reduces shareholders’ claims and discourages the restructuring of labour contracts: reorganizations are more likely to fail and firms get liquidated. As a result, pro-creditors reforms can cause expected recovery values to fall and raise the cost of debt. I characterize this trade-off in a static model and show that the optimal level of creditor rights decreases with the bargaining power of workers. To test the theory, I exploit the heterogeneity in the U.S. states unionization coverage, and a shift towards a more creditor-friendly Chapter 11 in 1998. I then develop a firm dynamic model and calibrate it to the pre-1998 period. The model can account for the larger fall in the relative use and likelihood of success of Chapter 11 in regions where workers extract more rents. Chapter 3 (joint work with Omar Rachedi) studies the series of US annual corporate default rates from 1950 until 2012. We document the presence of one structural break in the unconditional mean, which is dated in 1986. Meanwhile credit spreads hardly moved. We present a dynamic equilibrium model where the development of credit markets accounts for this empirical evidence. Financial development increases both the default rate and firms’ expected recovery rates. These two effects off set each other and translate into constant credit spreads. In the model financial development explains 64% of the rise in default rates and predicts just a 2 basis point increase in the credit spreads. Furthermore, the model accounts for a number of trends that characterized public firms over the last decades: the fall in the number of firms distributing dividends, the rise in the degree of dividend smoothing, and the increase in the volatility of public firms.