Creditor Rights, Debt Capacity and Securities Issuance : Evidence from Anti-Recharacterization Laws

This paper examines the effects of improvement in creditors' rights protection on firms' financing choices and securities issuance. I exploit exogenous variation in creditors' rights protection induced by the staggered adoption of anti-recharacterization laws by some U.S. states. Using difference-in-difference to estimate the causal impacts, I find that: [1] the laws are positively related to debt capacity and debt maturity. Firms substitute away from short-term debt into long-term debt financing [2] the laws are positively related to debt issuance and negatively related to equity issuance. Proactive issuers are significantly more responsive to the adoption of the laws than passive issuers