Financial versus Social Efficiency of Corporate Bankruptcy Law: the French Dilemma?

Régis Blazy, Bertrand Chopard, Agnès Fimayer and Jean-Daniel Guigou

Working Papers of BETA from Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg

Abstract: We study the French dilemma associated with court administered resolution of corporate financial distress of firms, in which bankruptcy courts have to combine both social efficiency (maintaining employment) and ex post financial efficiency (determining the best issue for financial distress, proxied here by the global recovery rate). We discuss this dilemma empirically, using a large sample of decisions of French commercial courts concerning the future of bankrupt firms (reorganization, sale as a going concern or liquidation). Addressing this dilemma, we discuss the determinants of bankruptcy courts’ selection between rival offers in sales as a going concern. Finally, we evaluate the financial cost of the French pro debtor system through the recovery rates of various claimants. Our main results are: (1) French commercial courts actively work to protect employment by facilitating continuation and reducing the domino effects of bankruptcy. (2) the courts’ choice between rival buyout offers confirms that social considerations prevail in the arbitration of bankruptcy courts. (3) Continuations through reorganization plans generate the highest recovery rates for all classes of creditors. (4) Contrary to the expected trade-off between social and financial efficiency, courts also enact measures to increase debt recovery once continuation has been chosen. However, for sales, recovery rates are inhibited by asset illiquidity and/or by the courts’ attempt to promote a firm’s continuation through sales at a low price.

Keywords: Bankruptcy, Reorganization; Liquidation; Recovery rate. (search for similar items in EconPapers)
JEL-codes: G33 K22 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-cfn and nep-law
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Related works:
Working Paper: Financial versus Social Efficiency of Corporate Bankruptcy Law: the French Dilemma? (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:ulp:sbbeta:2009-12

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