Measuring the ex-ante incentive effects of bankruptcy reorganization procedures

Ashwini Agrawal, Juanita Gonzalez-Uribe and Jimmy Martinez-Correa

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: The EU's 2019 Insolvency Directive increases debt holders' control over bankruptcy reorganization proceedings, mirroring recent trends in U.S. Chapter 11. Critics, however, claim that too few insolvent firms use similar procedures to avoid liquidation. This view has remained unchallenged, as prior empirical work mostly studies reforms to liquidation proceedings, rather than reorganization alone. We argue that the critics' perspective is misleading, because it ignores the rules' ex-ante incentive effects on solvent firm debt and equity holders. We use administrative microdata to show that similar reforms to Danish bankruptcy reorganization actually caused a steep decline in liquidations. While few insolvent firms file for reorganization, solvent firms show significant improvements in financial management. The findings shed light on the causal effects of recent changes to European bankruptcy law and U.S. Chapter 11.

JEL-codes: G00 G30 G33 G38 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2020-05-24
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