A Study of Inefficient Going Concerns in Bankruptcy

Abstract:     
This paper provides the first large-scale study measuring the bias in favour of going concerns induced by court-administered bankruptcy procedures. Although we find that the large majority of bankrupt firms in our sample are kept as going concerns, the evidence suggests that they sharply reduce aggregate proceeds to pre-bankruptcy creditors, and almost three quarters are eventually closed and sold piecemeal. These results arise because of the combination of poor court oversight and the compensation scheme awarded to the trustee, managing the bankrupt company. This suggests the particular architecture of court-administered codes can give rise to very different levels of inefficiency.

Number of Pages in PDF File: 45

Keywords: G21, G30, G33

JEL Classification: G21, G30, G33

working papers series