DP Hybrid seminar: European insolvency law and firm leverage

The European Commission (EC) intends to take steps towards harmonisation of insolvency law across the European Union (EU). This will affect the position of both debtors and creditors during insolvency procedures, and therefore impact firms' capital structure. In this paper we investigate the impact of insolvency law changes on firm leverage in EU member states. Using firm-level information for over 1 million European corporates, we find that improving the quality of insolvency law has a positive effect on firm long-term leverage. This is offset by a decrease in short-term debt, as the improvement in insolvency law strengthens the future position of both debtors and creditors. Interestingly, we find that these effects are mainly driven by the improvement in debtors' rights, lending support to the demand-side channel determining the leverage position of firms.