Dissecting bankruptcy frictions

Winston Dou, Lucian A. Taylor, Wei Wang and Wenyu Wang

Journal of Financial Economics, 2021, vol. 142, issue 3, 975-1000

Abstract: How efficient is corporate bankruptcy in the United States? Two frictions, asymmetric information and conflicts of interest among creditors, can cause several inefficiencies: excess liquidation, excess continuation, and excess delay. We find large bankruptcy inefficiencies, mainly due to excess delay. Eliminating information asymmetries would increase average total payouts by 4%, and eliminating conflicts of interest would increase them by 18% more. Without these frictions, 14% more cases would be resolved pre-court, and court cases would be 73% shorter. With less delay, bankruptcy’s indirect costs would be much lower. In contrast, inefficiencies from excess liquidation and excess continuation are quite small.

Keywords: Bankruptcy; Structural estimation; Conflicts of interest; Asymmetric information (search for similar items in EconPapers)
JEL-codes: C78 D82 G33 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:142:y:2021:i:3:p:975-1000

DOI: 10.1016/j.jfineco.2021.06.014

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