For years, lenders and the IMF have told developing countries that if they really want economic growth they need to adopt strong creditor-protection laws. Without that, no one will lend–or so they said. A new empirical paper takes another cut at that advice. According to a country-by-country analysis of merger and acquisition behavior, Creditors’ Rights and Corporate Risk-Taking, strong bankruptcy laws may do more to promote beneficial risk-taking and economic growth.
The insight of the paper is interesting: strong creditor rights make corporations risk averse. As a result, these laws "induce costly risk avoidance," causing the companies to engage in practices that fail to maximize the value of the firm and it’s potential. The study finds the effects are particularly strong in countries where management is ousted whenever the business fails.