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Debt-to-equity conversion in bankruptcy reorganization and post-bankruptcy firm survival

Jaka Cepec and Peter Grajzl ()

International Review of Law and Economics, 2020, vol. 61, issue C

Abstract: Debt-to-equity conversion is a commonly used legal tool for financial restructuring of ailing businesses, yet systematic evidence on the consequences of debt-to-equity conversion for firm outcomes is scarce. Drawing on a novel dataset of bankruptcy reorganizations from Slovenia and exploiting variation in the incidence of debt-to-equity conversion across firms, we provide the first empirical analysis of the role of debt-to-equity conversion in bankruptcy reorganization as a determinant of post-bankruptcy firm survival. To address endogeneity concerns, we use a plethora of controls and fixed effects, quantify the sensitivity of our estimates to selection on unobservables, and rely on instrumental variable methods. We find that debt-to-equity conversion is robustly negatively associated with prospects of post-bankruptcy firm failure. Our findings provide a novel input into ongoing debates about the appropriate design of corporate bankruptcy institutions.

Keywords: Corporate bankruptcy; Debt-to-equity conversion; Financial reorganization; Firm survival (search for similar items in EconPapers)
JEL-codes: G33 G32 K22 L25 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.irle.2019.105878

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