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The Efficiency of the Bankruptcy Process. An International Comparison

Klas Buttwill () and Clas Wihlborg
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Klas Buttwill: Department of Economics, Postal: School of Economics and Commercial Law, Göteborg University, Box 640, SE-405 30 Göteborg, Sweden

No 65, Ratio Working Papers from The Ratio Institute

Abstract: Failure of projects and firms are an inherent element of growth. Economic growth requires that old activities are phased out to make room for new ones, and that economic resources are reallocated from activities that are no longer profitable. In an economy where most firms are financed by debt to a substantial extent, insolvencies inevitably play an important role in restructuring. Insolvency leads to formal bankruptcy when legal procedures are employed to liquidate the insolvent firm’s assets in order to pay stakeholders fully or partially according to a priority established in law or contracts. In some countries legal procedures exist for restructuring as well as for liquidation. In other countries the restructuring of an insolvent firm is handled informally through negotiation. The economic roles of insolvency procedures are discussed (in Section 2) with an emphasis on dynamic aspects. In discussing the efficiency of insolvency procedures (in Section 3) we distinguish between ex ante and ex post efficiency. Since efficiency ultimately must be evaluated in terms of its dynamic effects, simple efficiency criteria are not easily identified. Formal insolvency procedures in different countries are classified (in Section 4) as more or less creditor or debtor oriented. Legal approaches can also be classified as more or less contractual or statutory. The important interdependence between formal and informal procedures is discussed in Section 5.Thereafter we turn in Section 6 to the empirical evidence on bankruptcy and restructuring in a number of countries with substantial differences in legal approaches to insolvency. We ask in Section 7 what explains the relatively high bankruptcy frequency in Sweden in an international comparison. Is the high frequency an indication of efficiency of procedures or does it indicate that viable firms are forced into bankruptcy unnecessarily?

Keywords: Bankruptcy; Insolvency; Restructuring; Contracting (search for similar items in EconPapers)
JEL-codes: G33 K22 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2005-01-18
New Economics Papers: this item is included in nep-ent and nep-law
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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