Implications of the Spanish Bankruptcy Reform on Corporate Cost of Debt

Abstract: This paper examines the effect of the Royal Decree Law 3/2009 of 27 March 2009 on the cost of debt for Spanish corporations. Using a difference-in-differences framework with a control group composed of the most creditworthy Spanish firms, we find that, following the reform, the cost of debt decreases more for the less creditworthy Spanish firms than for the most creditworthy ones. However, when a sample of Portuguese firms is instead used as control group, the reform appears to increase the cost of debt for Spanish firms. We conclude that the results obtained are insufficient to evaluate the effect of the reform with certainty. In particular, potential effects of the reform are hard to isolate from other simultaneous developments taking place during the financial crisis.