This dissertation is a collection of two self-contained papers on firm finance and bankruptcy. The first paper examines how optimal contracts are affected by legal environment. We obtain the following results: (i) A utility maximizing entrepreneur will invest all of his/her own equity in the project. (ii) For a given initial equity level, an increase in either exemption level or bankruptcy cost causes an increase in qualified borrowers. (iii) The less efficient a country's legal system, the higher the default probability is. (iv) A country with a less efficient legal system, more corruption, or stronger debtor protection would be more likely to experience equilibrium credit rationing, given loan demand. These results help understand interactions between firms and investors at different stages of economic development and to study how imperfect enforcement can affect credit markets.; The second paper estimates both bankruptcy costs and the debt recovery rate under the "Korean Bankruptcy Act". We analyze a sample of Korean business bankruptcies, which contains a total of 40 bankruptcy cases that formally closed. We obtain the following results: (i) The median bankruptcy cost standardized by assets at pre-filing under the "Korean Bankruptcy Act" is 4.6 percent. (ii) The median debt recovery rate standardized by assets at pre-filing under the "Korean Bankruptcy Act" is 57 percent while the median of shortfall is 43 percent. (iii) The median time in the "Korean Bankruptcy Act" is 924 days which is much longer than that in U.S. Chapter #7. (iv) There is a scale effect, i.e., the bankruptcy costs are inversely related to the size of firm. These results serve as legal parameters of the model and are crucial to study the optimal firm finance.
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