Busy bankruptcy courts and the cost of credit

This paper estimates the effect of bankruptcy court caseload on access to credit by ex-ploiting firms' plausibly exogenous exposure to the largest recorded drop in court back-log in the United States following the 2005 consumer bankruptcy reform. I show that a drop in court congestion reduces the time firms spend in bankruptcy and increases re-covery values, which is priced into credit spreads and loan maturities. Consistent with a shock to credit supply, less congested courts increase firm leverage but leave default risk unchanged. A back-of-the-envelope calculation suggests that backlog in bankruptcy courts costs corporate borrowers at least $740 million per year in interest payments. (c) 2021 Elsevier B.V. All rights reserved.