Stronger creditor rights in bankruptcy are often viewed as adding deadweight costs and leading to inefficient liquidation. However, ex ante, they also increase firms' borrowing capacity and reduce financial constraints. This study investigates shareholders' overall attitudes toward enhanced creditor rights in bankruptcy by examining the impact of the staggered adoption of anti-recharacterization laws across U.S. states on the cost of equity capital. We find that the strengthening of creditor rights leads to a significant reduction in the cost of equity capital, with the effect being more pronounced among financially constrained firms and firms with more growth opportunities and volatile cash flows. The reduction is stronger among firms that are more likely to utilize securitized debt. Overall, our results suggest that enhanced creditor rights in bankruptcy improve shareholder value through increased borrowing capacity.

We find that aggregate profitability and asset investment exhibit robust joint predictive power for aggregate excess stock returns, consistent with the investment model of Hou, Xue, and Zhang (henceforth HXZ, 2015). These results provide out-of-sample empirical support for HXZ, as the same mechanisms that HXZ use to explain firm-specific variation in stock returns can also be used to explain variation that is market-wide in nature. Also consistent with the HXZ investment model, we find that the growth rate of short-term (long-term) assets exhibits a stronger predictive power for one-year-ahead (two-year-ahead) stock returns.