·         The study examines the effect of a precedent ruling from 2013 that granted power to creditors to force insolvency proceedings on firms whose value of assets is lower than the value of their liabilities, even in the absence of an explicit covenant on the bond’s debt certificate.

·         Based on the market’s response, the study found that the ruling, which makes it possible to force debt restructuring at an earlier stage, when the company is still in a relatively benign state, was beneficial to bondholders (creditors) at the expense of shareholders.  The study also found that the net value of firms in distress that were affected by the ruling increased relative to other firms.  There are indications that firms in distress that were affected by the ruling raised more capital, but it seems that some of them also increased their value by using aggressive accounting.  As a result, the financial statements of these firms provide less credible information to investors.

·         This is the first study that examines the impact of an increase in creditors’ ability to force firms into debt restructuring, and is unique in its focus on the impact of creditors’ rights on the quality of firms’ financial reporting and accounting policies.  The findings show that firms’ reactions to changes that are intended to increase creditors’ rights in certain situations may mitigate those changes.