By Professor Yeejin Jang (School of Banking and Finance, University of New South Wales, Sydney), Jenny Jihyun Tak (School of Banking and Finance, UNSW Sydney), and Professor Wei Wang (Smith School of Business, Queen’s University)
Yeejin Jang, Jenny Jihyun Tak, and Wei Wang
The restructuring of financially distressed multinational companies is often complex and costly because those companies must comply with both domestic and foreign bankruptcy laws in different jurisdictions. Poor coordination between domestic and foreign bankruptcy courts can be an important source of inefficiency associated with the restructuring process. The Model Law on Cross-border Insolvency proposed by the United Nations Commission on International Trade Law (UNCITRAL) aims to promote coordination among courts to improve court coordination for cross-border insolvency proceedings. The U.S. Congress introduced Chapter 15 to its Bankruptcy Code in 2005 as part of the adoption of the Model Law. Foreign companies can use Chapter 15 as a proceeding ancillary to the main proceedings in their home countries. In this study, we use the Chapter 15 adoption by the U.S. as a unique setting to examine the effect of reduced uncertainty in resolving global insolvency on cross-border merger and acquisition (M&A) activities and the sources of financing.
Compiling a comprehensive dataset of Chapter 15 filings from 2005—2020, we find that Chapter 15 has been used extensively by foreign debtors since its adoption. The debtors mostly come from common law countries, countries that have a large bilateral trade with the U.S., and, importantly, countries with strong creditor rights and efficient bankruptcy systems. The evidence suggests that firms from certain countries benefit more from utilizing Chapter 15 than others.
We then investigate whether foreign firms located in countries that take advantage of Chapter 15 (i.e., Chapter 15 countries) acquire more U.S. assets after the law adoption than those in countries that would not seek Chapter 15 (i.e., non-Chapter 15 countries) to restructure their assets. Our results show that firms from Chapter 15 countries acquire 22% more U.S. targets after the enactment of Chapter 15 than foreign firms in non-Chapter 15 countries. The results are robust to using various matched sample analyses. Importantly, we do not find significant changes in the acquisition of non-U.S. targets or domestic acquisitions by non-U.S. firms.
To explore the economic connections between Chapter 15 enactment and cross-border acquisitions, we examine the financing channel through which the increase in cross-border investment is supported by the improved debt capacity of foreign firms. We find that the long-term leverage ratio of firms in countries that utilize Chapter 15 increases by 8.6%. Firms in those countries also issue more corporate bonds and extend more trade credit from their suppliers. We also document that U.S. lenders extend more credits to non-U.S. firms after the adoption of Chapter 15.
We also use the staggered adoption of the Model Law in 17 countries from 1997—2020 as exogenous shocks to the global insolvency procedure to show that countries that have reformed their international insolvency code experienced a significant increase in inbound acquisitions. Importantly, the inbound acquisitions are largely driven by acquiring firms that have efficient bankruptcy systems in their home countries.
In summary, this paper shows that judicial cooperation is essential in reducing legal uncertainties and promoting consistency in law enforcement in bankruptcies for multinational firms. Our empirical evidence suggests that the improvement in the international judicial process has real effects on cross-border investments.
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