Measuring the ex-ante incentive effects of bankruptcy reorganization procedures

Agrawal, Ashwini ORCID: 0000-0003-0865-9144, Gonzalez-Uribe, Juanita ORCID: 0000-0002-1945-7372 and Martinez-Correa, Jimmy (2020) Measuring the ex-ante incentive effects of bankruptcy reorganization procedures. Financial Markets Group Discussion Papers (799). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Abstract

The EU's 2019 Insolvency Directive increases debt holders' control over bankruptcy reorganization proceedings, mirroring recent trends in U.S. Chapter 11. Critics, however, claim that too few insolvent firms use similar procedures to avoid liquidation. This view has remained unchallenged, as prior empirical work mostly studies reforms to liquidation proceedings, rather than reorganization alone. We argue that the critics' perspective is misleading, because it ignores the rules' ex-ante incentive effects on solvent firm debt and equity holders. We use administrative microdata to show that similar reforms to Danish bankruptcy reorganization actually caused a steep decline in liquidations. While few insolvent firms file for reorganization, solvent firms show significant improvements in financial management. The findings shed light on the causal effects of recent changes to European bankruptcy law and U.S. Chapter 11.

Item Type:	Monograph (Discussion Paper)
Official URL:	https://www.fmg.ac.uk/
Additional Information:	© 2020 The Authors
Divisions:	Finance
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance
JEL classification:	G - Financial Economics > G0 - General > G00 - General G - Financial Economics > G3 - Corporate Finance and Governance > G30 - General G - Financial Economics > G3 - Corporate Finance and Governance > G33 - Bankruptcy; Liquidation G - Financial Economics > G3 - Corporate Finance and Governance > G38 - Government Policy and Regulation
Date Deposited:	23 May 2023 14:57
Last Modified:	11 Dec 2024 19:45
URI:	http://eprints.lse.ac.uk/id/eprint/118908

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