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An experimental study of the investment implications of bankruptcy laws

Mürüvvet Büyükboyacı, Mehmet Y. Gürdal, Arzu Kıbrıs and Özgür Kıbrıs

Journal of Economic Behavior & Organization, 2019, vol. 158, issue C, 607-629

Abstract: In bankruptcy laws, proportionality is the universal norm when allocating the liquidation value of a bankrupt firm among creditors. The theoretical literature on bankruptcy proposes two prominent alternatives to proportionality: the equal awards and the equal losses principles. We use an experiment to analyze and compare actual creditor behavior under these three principles. More specifically, we test the following hypotheses: replacing proportionality with equal losses increases total investment while replacing proportionality with equal awards decreases total investment; under all three principles individual investment choices decrease in response to an increase in the probability of bankruptcy or an increase in risk aversion; total investment difference between proportionality and either of the other two principles is independent of the probability of bankruptcy as long as both induce an interior equilibrium. The results of the nonparametric tests and random effects Tobit regression analyses we conduct on our experimental data offer support for all hypotheses.

Keywords: Bankruptcy; Investment game; Experiment; Proportional; Equal losses; Equal awards; Investment (search for similar items in EconPapers)
JEL-codes: C72 C91 D78 G33 (search for similar items in EconPapers)
Date: 2019
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