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Bankruptcy costs, idiosyncratic risk, and long-run growth

Acosta-Ormaechea, Santiago; Morozumi, Atsuyoshi

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Authors

Santiago Acosta-Ormaechea



Abstract

This paper analyzes how idiosyncratic risk, measured by the variance of firm-level idiosyncratic shocks, affects long-run growth when bankruptcy costs are present. These costs are incurred by creditors during the bankruptcy procedure of failing firms. In an endogenous growth model with bankruptcy costs where firms privately observe the outcome of idiosyncratic shocks, an increase in idiosyncratic risk reduces long-run growth. This happens because, when bankruptcy costs are present, higher idiosyncratic risk enlarges the wedge between the rental rate of capital and its marginal product, thereby slowing down capital accumulation. This growth-reducing effect of idiosyncratic risk is stronger when bankruptcy costs are higher. Empirical support for these propositions is provided in a growth regression that exploits cross-country variations in the dispersion of firms’ real sales growth as a proxy for idiosyncratic risk along with recovery rates as a measure that proxies the inverse of bankruptcy costs.

Citation

Acosta-Ormaechea, S., & Morozumi, A. (2023). Bankruptcy costs, idiosyncratic risk, and long-run growth. Macroeconomic Dynamics, 27(7), 1807-1842. https://doi.org/10.1017/s1365100522000475

Journal Article Type Article
Acceptance Date Aug 28, 2022
Online Publication Date Oct 19, 2022
Publication Date 2023-10
Deposit Date Nov 10, 2022
Publicly Available Date Nov 10, 2022
Journal Macroeconomic Dynamics
Print ISSN 1365-1005
Electronic ISSN 1469-8056
Publisher Cambridge University Press (CUP)
Peer Reviewed Peer Reviewed
Volume 27
Issue 7
Pages 1807-1842
DOI https://doi.org/10.1017/s1365100522000475
Keywords Economics and Econometrics
Public URL https://nottingham-repository.worktribe.com/output/13460279
Publisher URL https://www.cambridge.org/core/journals/macroeconomic-dynamics/article/bankruptcy-costs-idiosyncratic-risk-and-longrun-growth/04433CE2455BEE3D993EC2721393C7A0

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