Creditor Rights, Bankruptcy Resolution, and the Role of Accounting Quality

This dissertation investigates the effects of the creditor rights and the role of financial reporting in the debt markets. In Chapter 1, I focus on the impact of creditor rights and the role of accounting quality on the efficiency of bankruptcy resolutions. In Chapter 2, I study the relevance of the reporting of Key Performance Indicators (KPIs) in the debt markets.Chapter 1 studies the effects of creditor rights and the role of accounting quality on the efficiency of Chapter 11 bankruptcy proceedings. I exploit the staggered adoption of anti- recharacterization statutes that induce variations in creditor rights across states and time. My findings suggest that stronger creditor rights lead to more efficient bankruptcy proceedings. Specifically, I show that stronger creditor rights lead to higher enterprise value of the firm at bankruptcy resolution, which results in higher recovery rates for creditors. I also find better operating and financial performance for firms that emerge from bankruptcy, and a lower likelihood for emerged firms to require further restructuring after emergence. Moreover, I show both analytically and empirically that the benefits of creditor rights are higher when the information frictions in bankruptcies are lower, which is captured by higher quality accounting information. Finally, I extend the generalizability of my findings to a broader sample using credit default swap data. ii Chapter 2 studies the role of Key Performance Indicators (KPIs) in debt markets. I explore whether KPIs convey incremental information to debt investors and examine the reaction of the Credit Default Swap (CDS) market to the announcement of KPI news. Using data from four industries in which KPIs are common (airlines, retail, oil and gas, and telecommunication industries), I predict and find that the CDS market reacts significantly to the informational content embedded in KPIs. I further show that the impact of KPIs is stronger when investors’ demand for KPI information is higher. Consistent with the nonlinear payoff functions of debtholders, cross- sectional analyses show that the relevance of KPIs is higher when the company has a higher risk of financial distress, when the sign of KPI news is negative, and when the level of the KPI is lower than the industry-median level. I also find that the impact of KPIs is stronger when the company has lower earnings quality, corroborating the notion that KPIs provide incremental information relative to accounting earnings. Overall, my findings contribute to the literature studying the informational content of KPIs by showing their relevance to debtholders. This study also contributes to research on the determinants of credit risk by highlighting the role of KPIs, including both financial and non-financial metrics. Overall, this dissertation highlights the role of financial reporting in the debt markets. The evidence suggests that financial reporting has an impact on both the ex-ante expectation of credit risk and the ex-post efficiency of bankruptcy outcomes. This dissertation has implications for regulators regarding the current bankruptcy reforms in Europe and the reporting of performance metrics in the U.S.

Advisor: Hope, Ole-Kristian OKH