RESOLUTION OF FINANCIAL DISTRESS: A COMPARATIVE ANALYSIS OF U.S., U.K., AND JAPANESE FIRMS

Richard A. Ajayi (), Luminita Enache () and Seyed Mehdian ()
Additional contact information
Richard A. Ajayi: Department of Finance, College of Business Administration, University of Central Florida,Orlando FL 32816- 1400, Tel: (407)-823-5908
Luminita Enache: School of Accounting and Commercial Law, Victoria University of Wellington, P.O. Box 600, Wellington 6140, New Zealand
Seyed Mehdian: School of Management, University of Michigan - Flint, Tel: (810) - 762 - 3318

Review of Economic and Business Studies, 2012, issue 10, 147-163

Abstract: This paper presents a comprehensive analysis of reorganization provisions available to financially distressed firms in three major economies – the U.S. the U.K., and Japan. The paper addresses a central question of the relative effectiveness of the various bankruptcy laws in resolving corporate financial distress and providing opportunities for efficient and timely reorganization.The results indicate that in each of the three economies included in this study available opportunities seem to focus on improving the odds of rehabilitating viable but distressed firms.In the U.S. Chapter 11 provision, debtor in control feature is beneficiary to equity holders of the firm, since management’s goal is to maximize shareholder value. Under the U.K. bankruptcy code, creditors have complete control of the firm and the sole objective of creditors is to liquidate the firm and secure their claims. Majority of the firms which enter insolvency process are liquidated even if they could have benefitted from reorganization. In Japan, the creditors of the firm are usually the equity holders’ of the firm at the same time, due to its unique “main bank” system. Firms under financial distress are less likely to go through formal reorganization procedure. The U.S. has a debtor friendly bankruptcy codes while in the U.K. and Japan, creditors have the superior power under bankruptcy filing. Therefore, creditors and bankers are more likely to invest in the U.K. and Japan, while equity holders are more likely to favor investment in the U.S. The paper also presents empirical regularities or lack thereof in the dynamic of bankruptcy resolution evolution and growth rate of GDP in the three major markets.

Keywords: Liquidation; reorganization; pre-packaged bankruptcies; workouts; financial distress (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://rebs.feaa.uaic.ro/articles/pdfs/147.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aic:revebs:y:2012:i:10:ajayir

Access Statistics for this article

More articles in Review of Economic and Business Studies from Alexandru Ioan Cuza University, Faculty of Economics and Business Administration Contact information at EDIRC.
Bibliographic data for series maintained by Sireteanu Napoleon-Alexandru ().