Insolvency Regimes and Cross-Border Investment Decisions

Abstract

This paper investigates the effect of insolvency regulation reforms on cross-border debt and equity investments at aggregate and sectoral levels. Using disaggregated data from the ECB’s Securities Holdings Statistics by Sector (SHSS) database and the OECD indicators on efficiency of insolvency regulations, we find that investors increase their debt and equity holdings in the countries that undertook reforms of insolvency regulations and whose insolvency framework improved thereafter. The effect differs across sectors, with investments of institutional investors in equity and investments of banks in debt being particularly sensitive. In addition, shareholders are mostly responsive to prevention and streamlining tools, while debt holders respond more to availability of restructuring tools. Finally, we show that reforms of insolvency regulations are particularly effective in increasing cross-border debt and equity investments when the quality of insolvency regulations in holder and issuer countries is relatively similar, arguing for potential benefits of harmonizing insolvency regulations.