Macroeconomic Instability and Corporate Failure: The Role of the Legal System

Arnab Bhattacharjee, Higson Christopher, Sean Holly and Kattuman Paul
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Higson Christopher: London Business School
Kattuman Paul: University of Cambridge

Review of Law & Economics, 2009, vol. 5, issue 1, 1-32

Abstract: We examine how macroeconomic instability affects risk of bankruptcy and liquidation. In periods of macroeconomic instability more firms become financially distressed, while the number of potential acquirers falls. Reorganization systems such as Chapter 11 can decouple liquidation from macroeconomic conditions. We develop a model in which a firm's bankruptcy and acquisition hazards are co-determined by firm-level and sector-level factors, and by macroeconomic conditions. As a control, we also estimate the model for the UK, which is an economy without an equivalent system to Chapter 11. Differences in the responsiveness of bankruptcy to instability are largely attributable to reorganization under Chapter 11.

Date: 2009
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DOI: 10.2202/1555-5879.1136

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