 Optimal "Soft" or "Tough" Bankruptcy ProceduresThe Journal of Law, Economics, and Organization, 1999, vol. 15, issue 3, 659-84 Abstract: This article describes optimal bankruptcy laws in a framework with asymmetric information. The key idea is that the financial distress of a firm is not observed by its lenders for quite a while. As early rescues are much cheaper than late rescues, it may pay if the creditors are forgiving in bankruptcy, thereby inducing the revelation of difficulties as early as possible. Either "tough" or "soft" bankruptcy laws can be optimal, depending on the parameters. This implies that mandatory one-size-fits-all bankruptcy procedures cannot be optimal. "Hybrid" procedures, which try to combine elements of soft and tough procedures, are found to be redundant, and possibly harmful. Absolute priority rules may be helpful as a part of tough procedures, but their introduction is (partly) inconsistent with the design of soft procedures. The article also reinterprets much of the evidence on the performance of Chapter 11, the "rather soft" U.S. reorganization procedure, questioning many negative conclusions. Copyright 1999 by Oxford University Press. Date: 1999 There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:oup:jleorg:v:15:y:1999:i:3:p:659-84 Ordering information: This journal article can be ordered from Access Statistics for this article The Journal of Law, Economics, and Organization is currently edited by Andrea Prat More articles in The Journal of Law, Economics, and Organization from Oxford University Press Oxford University Press, Great Clarendon Street, Oxford OX2 6DP, UK. |
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