 optimal bankruptcy lawsNo 98-31, Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim, Sonderforschungsbereich 504, University of Mannheim Abstract: This paper studies 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 paper also reinterprets much of the evidence on the performance of Chapter 11, the `rather soft' U.S. reorganisation procedure, questioning many negative conclusions. Pages: 36 pages 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:xrs:sfbmaa:98-31 Ordering information: This working paper can be ordered from Access Statistics for this paper More papers in Sonderforschungsbereich 504 Publications from Sonderforschungsbereich 504, Universität Mannheim Contact information at EDIRC., Sonderforschungsbereich 504, University of Mannheim |
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