A Study of Inefficient Going Concerns in Bankruptcy

Julian Franks and Lóránth, Gyöngyi

No 5035, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper provides the first large-scale study measuring the bias in favour of going concerns induced by court-administered bankruptcy procedures. Although we find that the large majority of bankrupt firms in our sample of Hungarian firms are kept as going concerns, the evidence suggests that the going concern bias sharply reduces aggregate proceeds to pre-bankruptcy creditors. The high costs are accompanied by the eventual closure and piecemeal sale of three quarters of going concerns. These results arise because of poor court oversight and the compensation scheme awarded to the court appointed trustee managing the bankrupt company. Comparisons with other bankruptcy codes suggest that the application of the code and court procedures have an important impact on outcomes, including the degree of inefficiency.

Keywords: Compensation; Recovery rates; Allocation of Control Rights; Bankruptcy Code (search for similar items in EconPapers)
JEL-codes: G21 G30 G33 (search for similar items in EconPapers)
Date: 2005-05
New Economics Papers: this item is included in nep-fin
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Citations: View citations in EconPapers (4)

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