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Firms’ capital structure and the
bankruptcy law design
264
FUCAPE Business School, Vitória, Brazil
Bruno Funchal and Mateus Clovis
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.
Keywords Capital structure, Bankruptcy, Government policy, Regulation, Law, Brazil
Paper type Research paper
Journal of Financial Economic Policy
Vol. 1 No. 3, 2009
pp. 264-275
q Emerald Group Publishing Limited
1757-6385
DOI 10.1108/17576380911041737
I. Introduction
The goal of this paper is to study the impact of institutional changes – more specifically
changes in the bankruptcy law – on firms’ financing choices, in other words, their
capital structure.
Since, the seminal paper of Modigliani and Miller (1958), scholars have discussed the
capital structure choice. The most important departures from Modigliani and Miller’s
assumptions that make capital structure relevant to a firm’s value are known. Empirical
studies have reported some stylized facts on capital structure choice, but this evidence is
largely based on firms in the USA (Titman and Wessels, 1988), and it is not at all clear
how these facts relate to different economic environments. Hence, one cannot only rely
on existing findings in economics and corporate finance, because countries differ in their
economic environments.
In the empirical field, Booth et al. (2001), using data from developing countries, studied
the stylized facts about capital structure beyond the developed countries. They found that
the variables relevant to explain capital structure in the USA and Europe are also relevant
in developing countries, despite the differences in institutional factors. Rajan and Zingales
(1995) analyzed factors that influence the capital structure, including the institutional
differences, across the G-7 countries. Our paper focuses on one particular institution:
the bankruptcy law. We analyze how relevant creditors’ priority is for the firms’ capital
structure, especially in an institutional setting that provides a low level of creditors’
protection. We base this analysis on the 2005 Brazilian bankruptcy law reform.
Scott (1977) theoretically addressed the relationship between capital structure and
bankruptcy. He argued that when firms sell secured debt, they are not only selling a
JEL classification – G32, G33, G38, K00
promise of future repayment, but also rather the right to be the first in order of priority in
case of bankruptcy. Thus, the priority order defined by the bankruptcy law has a
significant value since it reduces the chance that debtors will not be repaid. This value
impacts the debt cost of debt and as a consequence the capital structure.
Taking advantage of the 2005 Brazilian bankruptcy law reform as an experiment,
this paper measures the impact of changes in the design of the bankruptcy law, mainly
due to the abrupt change in creditors’ priority, on firms’ choice of capital structure.
Intuitively, since the new bankruptcy law has improved creditors’ priority, their
expectations about recovery in insolvency states should increase. The more creditors
expect to receive in bankruptcy, the less they will require firms to pay in solvency, thus
reducing the cost of capital. A lower cost of debt financing encourages firms to increase
the share of debt in their capital structure.
By estimating an econometric model (panel with fixed effects) to measure the effect of
the changes in creditors’ priority order on firm-level capital structure, we find an
increase of approximately 8.4 percent, on average, of the share of debt in the capital
structure. This effect is divided into increases of 3.6 and 4.8 percent in the share of shortand long-term debt, respectively. Moreover, during the studied period, Brazil was
experiencing a period of high appreciation in its capital markets, making equity
financing more attractive. This feature reinforces the effect of bankruptcy reform on the
share of debt.
This result suggests that reforms of the bankruptcy law design that modify the
priority of stakeholders have a significant impact on firms financing policy. Therefore,
policy makers should keep in mind that by improving creditors’ priority, the cost of debt
will be reduced, making firms less credit constrained and motivating an increase in their
share of debt in the capital structure.
The remainder of the paper is organized as follows: Section II discusses the Brazilian
bankruptcy reform and its potential effects; Section III presents the empirical results;
and Section IV concludes.
II. The Brazilian bankruptcy law reform
The former legal framework for corporate insolvency in Brazil was very fragmented, with
the core of legislation for bankruptcy proceedings enacted in 1945. Despite providing
both liquidation and reorganization mechanisms to prevent or reduce the liquidation of
enterprises, in practice, the insolvency process was ineffective at maximizing asset values
and protecting creditor rights in liquidation. The bankruptcy priority rule specified the
following priority order: first, labor claims; second, tax claims; third, secured creditors’
claims; and finally, unsecured creditors’ claims (including trade credit).
The process of disposing of assets was also slow and highly ineffective, because of
court and procedural inefficiency, lack of transparency, and the so-called problema da
sucessão, whereby tax, labor, and other liabilities were transferred to the buyer of a
liquidated asset sold in liquidation, which deteriorated the market value of an insolvent
company’s assets. In addition, the priority given to labor and tax claims had the practical
effect of eliminating any protection to other creditors. The former reorganization
procedure (called concordata) was a process that postponed debt payment only and did
not deal with firms’ restructuring.
On June 9, 2005, the new legislation on bankruptcy (Law 11,101/05) took effect. The
new liquidation procedure introduced six key changes. First, labor credits are limited
Firms’ capital
structure
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266
to an amount equaling 150 times the minimum monthly wage[1]. Second, secured credits
are now given priority over tax credits. Third, unsecured credits are given priority above
some of the tax credits. Fourth, the distressed firm may be sold (preferably as a whole)
before the creditors’ list is constituted, which can speed up the process and increase the
value of the bankruptcy estate. Fifth, tax, labor, and other liabilities are no longer
transferred to the buyer of an asset sold in liquidation. Finally, any new credit extended
during the reorganization process is given first priority in the event of liquidation.
The first two changes have had a direct impact on secured creditors’ priority. Since
under the former bankruptcy law, secured creditors came after all labor and tax claims,
the priority given to secured creditors has increased significantly. The third one has
increased unsecured creditors’ priority. The fourth, fifth, and sixth changes, in turn, are
expected to increase the value of firms in bankruptcy and as a consequence the amount
recovered by creditors. The more creditors expect to receive in the insolvency state, the
less they will require firms to pay in the solvency state, thus reducing the cost of capital.
Brazil’s new reorganization procedure was inspired by Chapter 11 in the US
bankruptcy code. Whereas the previous law did not permit any renegotiation between
the interested parties and only a few parties were entitled to recover their assets, now
managers make a sweeping proposal for recuperation that must either be accepted by
workers, secured creditors and unsecured creditors (including trade creditors) or the
distressed firm will be liquidated. Creditors play a more significant role in the procedure
than previously, including negotiating and voting for the reorganization plan. Table I
summarizes the main changes in the Brazilian bankruptcy law.
Some data on creditors’ recovery rate will help to illustrate the main effects of the
bankruptcy law reform. Before the reform, the recovery rate in the case of bankruptcy
was a mere US$0.002 on the dollar in Brazil, while the average of Latin American and
Organization for Economic Cooperation and Development (OECD) countries was
US$0.27 and 0.66, respectively[2]. Basically, the reason for such low recovery was the
priority order, since creditors ranked behind labor and tax claims. Thus, the remaining
amount from the bankruptcy process used to pay creditors was usually insignificant
or nil.
Liquidation
Priority order
Secured
creditors
Unsecured
creditors
Liabilities
Table I.
The main changes in the
Brazilian bankruptcy law
Reorganization
Postbankruptcy
credit
Role of
creditors
New law
Former law
Second in the priority order: after labor
claims limited to 150 minimum monthly
wages
Fourth in the priority order: after labor,
secured creditors, and some tax claims
Tax, labor, and other liabilities are no
longer transferred to the buyer of an
asset sold in liquidation
Third in the priority order: after labor
and tax claims
First to receive if the firm goes to
liquidation
Creditors negotiate and vote for the
reorganization plan
Third to receive if the firm goes to
liquidation, after labor and tax claims
None
Fourth in the priority order: after labor,
secured creditors, and tax claims
Tax, labor, and other liabilities were
transferred to the buyer of a liquidated
property sold in liquidation
As a consequence, of the bankruptcy reform, in 2006 creditors’ recovery rate increased to
US$0.12 on the dollar in Brazil, while the average of Latin American and OECD countries
remained stable (US$0.29 and 0.67, respectively)[3].
The effects on debt financing: a simple model
The relationship between the bankruptcy design and its effects on cost of capital can
be illustrated using a simple model. Suppose that:
.
H1 – the borrowing firm is run by an owner/manager;
.
H2 – capital markets are competitive;
.
H3 – creditors can predict their mean pay-offs in the default state; and
.
H4 – creditors and the firm are risk-neutral.
We make the first assumption because we are not dealing with the corporate governance
problem. The second assumption is realistic. The third rests on the view that
professional creditors have considerable experience with default, and the fourth is more
accurate when applied to firms than to individual persons.
The borrowing firm has a project that requires capital, I, which the firm must raise
externally. The firm promises to repay creditors the sum, F (where F ¼ I ð1 þ rÞ). The
project can return a value, v, where the firm is solvent if v $ F and insolvent if v , F. Two
states of nature are possible in the future, one if the firm is solvent and the other if it is not.
The solvency and insolvency states return to the firm vsolv and vins, respectively,
where vsolv $ F . vins . The probability of solvency is psolv; the probability of insolvency
is ð1 2 psolv Þ. This implies that the expected value of the project is
EðvÞ ¼ psolv vsolv þ ð1 2 psolv Þvins . The bankruptcy system costs c to run. A
bankruptcy system can thus distribute to the creditors of an insolvent firm at most
the sum vins 2 c, so the repayment to creditors is F if the firm is solvent and vins 2 c if it
goes bankrupt and if creditors are the first to receive in the priority rule.
Because the credit market is competitive, F is the largest sum that creditors can
demand to fund the project. For simplicity, the risk-free interest rate is assumed to be
zero, so that a borrowing firm’s interest rate is a function only of the riskiness of its
project and the properties of the bankruptcy system in place.
Creditors that lend I should expect to receive I in return. This expectation can be
written as follows:
I ¼ psolv F þ ð1 2 psolv Þðvins 2 cÞ
F¼
I 2 ð1 2 psolv Þðvins 2 cÞ
:
psolv
If the bankruptcy law decrees, the priority of tax (t) and/or labor (l ) claims over secured
creditors’ claims, creditors will receive the maximum between the zero and
ðvins 2 c 2 l 2 tÞ. Then, the financing condition for creditors is:
I ¼ psolv F þ ð1 2 psolv Þmaxðvins 2 c 2 l 2 t; 0Þ:
Notice that creditors’ insolvency recovery may fall to zero in this situation, which would
strongly increase the cost of capital, and therefore, an improvement in creditors’ priority
raises their recovery rate, as occurred in Brazil right after the new law went into force.
Firms’ capital
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268
If the expected value that creditors recover in insolvency states increases (that is,
maxðvins 2 c 2 l 2 t; 0Þ rises to maxðvins 2 c 2 l; 0Þ, where l is the labor claims limited
to 150 times the monthly minimum wage), then F declines, diminishing the interest rate
charged by creditors.
The more that creditors expect to receive in the insolvency state, the less they will
require the firm to repay in the solvency state. The firm’s interest rate is r ¼ ðF=I Þ 2 1,
which is increasing in F.
Denoting by vuins , c u and l u the per-unit-of-investment (I ¼ 1) counterparts of vins,
c and l, we also have:
ð1 2 psolv Þ 1 2 max vuins 2 c u 2 l u ; 0 ;
r¼
psolv
which is decreasing in recovery rate in insolvency states:
P1.
The priority of creditors’ claims over labor and/or tax claims decreases the
cost of capital.
Therefore, the increase in recovery rate is a natural consequence of an improvement in
creditors’ priority, as evidenced in Brazil. Figure 1, which presents the evolution in
creditors’ recovery rate, shows an abrupt increase in this rate after the reform. Since the
new law took effect in June 2005, all the procedures thereafter have followed the new rule,
increasing the recovery rate from ¢0.2 on the dollar in 2004 to ¢12, 14 and 17 on the dollar
in 2006, 2007, and 2008, respectively.
As expected by P1, there was a reduction in the cost of debt to Brazilian firms (Figure 2).
Notice that the downward trend starts just after the Brazilian bankruptcy reform, and,
therefore, ceteris paribus, more projects tend to be financed using debt instead of equity.
III. Empirical results
In this paper, we used firm-specific accounting data[4] for 389 publicly traded firms from
2002 to 2007[5]. We considered as firm share of debt in the capital structure[6], the sum of
short-term debt, long-term debt, and accounts payable[7] divided by the firm value (total
debt plus market value).
We also separately analyzed the effect on the short-term debt share (short-term debt
plus accounts payable divided by the firm value) and long-term debt share (long-term
debt divided by firm value), used as proxies of unsecured and secured debt, respectively.
Since the priority changes differently for secured and unsecured creditors, we expect
different effects on both types of credit.
Cents on the dollar
20
Figure 1.
Evolution of creditors’
recovery rate
Creditors’ recovery rate
16
12
8
4
0
2003
2004
2005
2006
Source: Doing business – World Bank
2007
2008
2009
45
Firms’ capital
structure
Firms’ cost of debt
Interest rate
40
35
30
269
25
20
15
Ja
n0
M 2
ay
-0
Se 2
p02
Ja
n0
M 3
ay
-0
Se 3
p03
Ja
n0
M 4
ay
-0
Se 4
p04
Ja
n0
M 5
ay
-0
Se 5
p05
Ja
n0
M 6
ay
-0
Se 6
p06
Ja
n0
M 7
ay
-0
Se 7
p07
Figure 2.
Evolution of firms’ cost of
debt
Source: Brazilian central bank
Table II reports the descriptive statistics of our variable of interest (share of debt in the
capital structure). Notice that the share of debt (total, short-term, and long-term) presents
a downward trend from the period before to after the bankruptcy reform. The mean of
the share of debt went down from 51 percent before the new law to 35 percent afterward,
which means in relative terms a reduction of 31 percent of debt in the capital structure
(16 percent of 51 percent).
This downward trend is somewhat unexpected. We observe in the descriptive
statistics, for the pre- and post-bankruptcy reform period, a reduction in the share of debt,
although we expect a contrary tendency due to a reduction in the cost of capital (P1).
The explanation for this trend is the significant increase of the market value of
Brazilian firms, and since the market value is used to measure the share of debt (total
debt divided by the firm value, where the firm value is total debt plus market value),
this increase directly affected our capital structure metric.
Figure 3 shows that the level of the São Paulo Stock Market Index (IBOVESPA)
fluctuated between 9,000 and 25,000 points from 2002 to 2004, while it fluctuated
between 25,000 and 65,000 points in 2005-2007. This trend encouraged firms to finance
themselves by issuing equity, reducing the portion of debt in the capital structure.
Before the bankruptcy law reform (2002-2004)
Total debt
Short-term debt
Long-term debt
After the bankruptcy law reform (2005-2007)
Total debt
Short-term debt
Long-term debt
All period (2002-2007)
Total debt
Short-term debt
Long-term debt
Mean
SD
0.51
0.32
0.19
0.28
0.24
0.19
0.35
0.20
0.14
0.26
0.21
0.16
0.43
0.26
0.17
0.29
0.23
0.18
Table II.
Descriptive statistics –
share of debt
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12.2007
07.2007
02.2007
09.2006
04.2006
11.2005
06.2005
01.2005
08.2004
03.2004
10.2003
05.2003
12.2002
07.2002
02.2002
09.2001
04.2001
11.2000
Figure 3.
São Paulo Stock Market
Index (IBOVESPA)
06.2000
270
01.2000
Points
IBOVESPA
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
Period
Source: Economatica
Thus, two important issues must be observed: first, it is important to set the São Paulo
Stock Market Index (in logs) as a control for the capital market trend in our empirical
model; second, the Brazilian economic environment provides a unique characteristic for
this research, since the reform was enacted in a period where equity financing was very
attractive, reinforcing the potential impact of the bankruptcy reform on debt share in the
capital structure.
In addition, the São Paulo Stock Exchange, we used as control variables the amount
of firms’ assets in thousands of Brazilian Reais[8] (logarithm) and macroeconomic data,
such as the logarithm of the real gross domestic product (GDP) in millions of Brazilian
Reais (logarithm), inflation index[9], risk-free interest rate (SELIC and the benchmark
rate) and Brazilian global bonds in basis points. The GDP variable was used to control
our estimation for business cycles. The inflation and the risk-free interest rates were
included to control for the trend of prices and the risk-free component of the cost of debt,
respectively, common to all firms, and the Brazilian Global Bonds to control for the risk
perception of investors. The data were obtained from both the Economatica and
Ipeadata databases (www.ipeadata.gov.br). Table III summarizes the descriptive
statistics of all control variables.
To estimate the impact of changes in creditors’ priority brought by the new Brazilian
bankruptcy law on firms’ share of debt (total, short-term, and long-term), we used a panel
regression with cross-firm fixed effects, represented by the following functional form:
share_debtit ¼ ai þ g1 d_BRt þ GX it þ 1it :
ð1Þ
The main results come from the bankruptcy law reform dummy (d_BR), which assumes
zero for the pre-reform period (2002-2004) and one for the post-reform period (2005-2007).
The set of controls is represented by the vector Xit.
The results of regression (1) reported in Table IV indicate that the bankruptcy law
reform had a significant impact on the capital structure[10],[11]. Panels A-C show that
due to the bankruptcy reform, firms increased their share of debt by 8.4 percent, of which
3.6 percent represents short-term debt and 4.8 percent long-term debt. In relative terms,
the share of total debt went up approximately 17 percent (8.4 percent of 51 percent),
while the share of long-term debt increased 25 percent and the short-term debt only
11 percent.
This empirical result is aligned with our theoretical predictions. Intuitively, the
improvement in creditors’ priority reduces their risk of not getting repaid, making debt
Mean
Before the bankruptcy law reform (2002-2004)
GDP (logarithm)
INFLATION (index)
SELIC (%)
GB (index)
IBOV (index)
ASSETS (logarithm)
After the bankruptcy law reform (2005-2007)
GDP (logarithm)
INFLATION (index)
SELIC (%)
GB (index)
IBOV (index)
ASSETS (logarithm)
All period (2002-2007)
GDP (logarithm)
INFLATION (index)
SELIC (%)
GB (index)
IBOV (index)
ASSETS (logarithm)
SD
14.65
119.00
19.07
910.00
15,755
13.32
0.03
14.69
2.93
338.35
4,260
2.30
14.77
147.93
15.50
216.94
40,428
13.36
0.04
4.10
2.90
108.10
12,188
2.48
14.71
133.80
17.59
563.47
28,320
13.34
0.07
17.78
3.60
428.00
15,351
2.40
financing cheaper and as a consequence, motivating firms to resort to debt. Thus,
despite the downward trend of debt financing (as seen in Table II), the bankruptcy
reform induced an increase of the share of debt in the capital structure.
But why do we observe a stronger effect on long-term debt compared with short-term
debt? This can be explained by the difference in the change of priorities to secured
debtors and unsecured creditors. The Brazilian reform benefits secured creditors more
than unsecured ones because they have passed to second in priority, just after labor
claims (limited to 150 times the minimum monthly wage) (Table I).
To better understand the capital structure choice, now we explore firms’
heterogeneous responses to the bankruptcy reform. We study firms’ capital structure
choice as a function of their relative size, using total assets (logarithm) as a measure of
firms’ size. Firms with more assets should be less sensitive to the reform since they can
finance themselves by debt more easily using their assets as collateral.
To analyze heterogeneity, we add one term in regression (1):
share_debtit ¼ ai þ g1 d_BRt þ g2 ðd_BRt · ASSETSit Þ þ GX it þ 1it ;
ð2Þ
where the interaction of the bankruptcy reform dummy and the logarithm of firm
assets (d_BR · ASSETS) captures the firm-size effect.
Table V presents the results[10],[11]. Panels A and C show that the bankruptcy
reform provided an increase in the debt portion, which is stronger for smaller firms, since
the interacted variable d_BR · ASSETS has a negative sign. This impact is significant
for the share of total and long-term debt. However, the result is not the same for
short-term debt alone (Panel B). Since such debt does not require collateral, it is also
expected that the amount of assets should not affect unsecured debt financing.
Firms’ capital
structure
271
Table III.
Descriptive statistics –
control variables
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272
Table IV.
Panel regression with
fixed effects: share of debt
Coefficient
Panel A: dependent variable: total debt
Intercept
21.360
d_BR
0.084
ASSETS
0.077
GDP
0.334
GB
20.008
SELIC
20.010
IBOV
20.397
Number of observations: 1,541, R 2: 0.106, F-statistic: 74.49
Panel B: dependent variable: short-term debt
Intercept
230.80
d_BR
0.036
ASSETS
0.049
GDP
2.540
GB
20.022
SELIC
20.006
IBOV
20.678
Number of observations: 1,541, R 2: 0.037, F-statistic: 74.44
Panel C: dependent variable: long-term debt
Intercept
29.44
d_BR
0.048
ASSETS
0.028
GDP
22.210
GB
0.014
SELIC
20.004
IBOV
0.280
Number of observations: 1,541, R 2: 0.093, F-statistic: 11.58
Robust SE
p-value
22.130
0.016
0.021
1.696
0.010
0.002
0.281
0.950
0.000
0.000
0.844
0.392
0.000
0.157
21.56
0.015
0.018
1.655
0.010
0.002
0.278
0.153
0.016
0.005
0.124
0.025
0.008
0.015
20.17
0.013
0.014
1.547
0.010
0.002
0.258
0.145
0.001
0.052
0.153
0.128
0.075
0.278
Notes: This table presents the results of panel robust regressions, with fixed effects, of the firms’
share of debt on bankruptcy reform variable (d_BR), which is represented by a dummy variable
codified as 0 before 2005 and 1 after 2005; Panel A presents results for total debt share, while Panels B
and C present results partitioning by short- and long-term debt share; we control for the logarithm of
firms’ assets (ASSETS) and for macroeconomic variables as the logarithm of GDP, Brazilian risk-free
interest rate (SELIC), the logarithm of São Paulo Stock Market Index (IBOV) and Brazilian Global
Bonds in hundreds of points (GB)
Figures 4 and 5 show the heterogeneous effect of the Brazilian bankruptcy law reform.
Computing the reform effect stratified by quartiles[12], we observe that it is stronger
for firms that hold lower amounts of assets.
The share of total and long-term debt increases almost 15 and 12 percent,
respectively, for the smaller firms, while it increases only 6 and 2 percent, respectively,
for bigger firms.
Therefore, we can conclude that although the change in bankruptcy law design has
had a significant effect on firms’ financing policy, it has had more relevance and benefits
for smaller firms.
IV. Conclusion
The main goal of this paper was to study the impact of changes in creditors’ priority
order on firms’ capital structure. To measure this effect, we took advantage of the recent
Coefficient
Panel A: dependent variable: total debt
Intercept
22.246
d_BR
0.246
d_BR*ASSETS
20.011
ASSETS
0.008
GDP
0.396
GB
20.009
SELIC
20.010
IBOV
20.411
Number of observations: 1,541, R 2: 0.144, F-statistic: 69.91
Panel B: dependent variable: short-term debt
Intercept
230.588
d_BR
20.003
d_BR*ASSETS
0.002
ASSETS
0.047
GDP
2.530
GB
20.022
SELIC
20.006
IBOV
20.67
Number of observations: 1,541, R 2: 0.032, F-statistic: 43.07
Panel C: dependent variable: long-term debt
Intercept
28.323
d_BR
0.250
d_BR*ASSETS
20.014
ASSETS
0.004
GDP
22.134
GB
0.012
SELIC
20.004
IBOV
0.263
Number of observations: 1,541, R 2: 0.097, F-statistic: 12.89
Robust SE
p-value
21.830
0.057
0.004
0.021
1.673
0.009
0.002
0.277
0.917
0.000
0.003
0.000
0.813
0.344
0.000
0.138
21.594
0.058
0.004
0.018
1.658
0.010
0.002
0.279
0.157
0.958
0.466
0.009
0.127
0.026
0.008
0.016
19.930
0.051
0.003
0.014
1.529
0.009
0.002
0.256
0.156
0.000
0.000
0.004
0.163
0.153
0.068
0.303
Notes: This table presents the results of panel robust regressions, with fixed effects, of the firms’
share of debt on bankruptcy reform variable (d_BR), which is represented by a dummy variable
codified as 0 before 2005 and 1 after 2005; Panel A presents results for total debt share, while Panels B
and C present results partitioning by short- and long-term debt share; we control for the logarithm of
firms’ assets (ASSETS) and for macroeconomic variables as the logarithm of GDP, Brazilian risk-free
interest rate (SELIC), the logarithm of São Paulo Stock Market Index (IBOV) and Brazilian Global
Bonds in hundreds of points (GB)
Brazilian bankruptcy law reform, whose main change is the improvement of secured and
unsecured creditors’ priority.
Using data from firms’ balance-sheets and despite the trend for a fall in the share of
debt in the capital structure during 2002-2007, we found that the reform has brought an
increase of 8.4 percent, on average, of the debt share. This effect is divided into respective
increases of 3.6 and 4.8 percent in the short-term and long-term debt share. This is
explained by the improvement in creditors’ priority, since this reduces the chance of not
being repaid, decreasing the cost of debt and as a result motivating firms to resort to debt
funding.
We can also conclude that the bankruptcy law reform had a different effect on firms
financing policy depending on firm size, benefiting smaller firms more.
Firms’ capital
structure
273
Table V.
Panel regression with
fixed effects:
heterogeneous effect on
share of debt
JFEP
1,3
Share of total debt variation
0.15
274
Figure 4.
Bankruptcy law effect on
the share of total debt
0.13
0.11
0.09
0.07
0.05
Min
0.25
0.50
0.75
Assets percentile
Max
Share of long-term debt variation
0.12
Figure 5.
Bankruptcy law effect on
the share of long-term debt
0.1
0.08
0.06
0.04
0.02
0
Min
0.25
0.50
Assets percentile
0.75
Max
Notes
1. Brazil has a minimum monthly wage, called the salário mı́nimo, rather than a minimum
hourly wage.
2. Doing Business 2005 – World Bank.
3. Doing Business 2007 – World Bank.
4. Brazilian firms follow Brazilian Generally Accepted Accounting Principles in their financial
reports.
5. Our study excludes all financial firms, since the reform did not apply to them.
6. The end of the fiscal year.
7. We add accounts payable since trade credit is a relevant source of firms’ financing (see
Love et al. (2007) and Nilsen (2002) for more details), and they were directly benefited by the
reform.
8. Brazilian Reais is the national currency.
9. Base year 2002.
Firms’ capital
structure
10. Inflation was dropped due to multicollinearity.
11. Since the residuals in all regressions are heteroskedastic, we use robust standard errors in all
specifications.
12. The effect is calculated in the following way: g^1 þ g^2 · ASSETSQuartile :
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About the authors
Bruno Funchal did his PhD in Economics at the Getúlio Vargas Foundation, Brazil. He finished his
post-doc in Mathematical Economics at the National Institute of Pure and Applied Mathematics,
Brazil and is a Full Professor at the FUCAPE Business School. Bruno Funchal is the corresponding
author and can be contacted at: [email protected]
Mateus Clovis is a Master in Accounting at the FUCAPE Business School.
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