Severe or gentle bankruptcy law: Which impact on investing and financing decisions?

► We study how bankruptcy law impacts on investing and financing decisions. ► Our theoretical framework focuses on legal sanctions against faulty management. ► Extreme severity against the managers is not needed to implement social efficiency. ► Creditors may accept a certain level of moral hazard when sanctions are moderate. ► Debtors may benefit from accrued severity thanks to a decrease in interest rate.