Stiffing the Creditor: The Effect of Asset Verifiability on Bankruptcy

87 Pages Posted: 7 Feb 2017 Last revised: 10 May 2019

See all articles by Erasmo Giambona

Erasmo Giambona

Syracuse University - Whitman School of Management - Finance Department; James D. Kuhn Center for Real Estate

Florencio Lopez de Silanes

SKEMA Business School; National Bureau of Economic Research (NBER)

Rafael Matta

SKEMA Business School - Université Côte d'Azur

Date Written: May 7, 2019

Abstract

Evidence suggests that asset pledgeability, debt complexity, and valuable control rights of dispersed debt influence distress resolution. We model how courts' imperfect verifiability of assets and valuable control of misaligned creditors shape firms' debt structure and create coordination problems that determine distress outcomes and financing. We test the model's predictions using an exogenous variation of in-court requirements to evaluate debtor proposals: The 1999 U.S. Supreme Court surprise ruling requiring reorganization plans that keep stockholders' interest to be exposed to a “market test”. We show that improved creditor protection significantly increases bankruptcy filings, recovery rates, and debt capacity of low-verifiability firms.

Keywords: Asset Verifiability, Bankruptcy, Chapter 11, Distress, Coordination, Creditor Protection

JEL Classification: G33, G34, G38

Suggested Citation

Giambona, Erasmo and Lopez de Silanes, Florencio and Matta, Rafael, Stiffing the Creditor: The Effect of Asset Verifiability on Bankruptcy (May 7, 2019). Available at SSRN: https://ssrn.com/abstract=2912366 or http://dx.doi.org/10.2139/ssrn.2912366

Erasmo Giambona (Contact Author)

Syracuse University - Whitman School of Management - Finance Department; James D. Kuhn Center for Real Estate ( email )

721 University Avenue
RM 120-D
Syracuse, NY 13244-2450
United States
315 443-4885 (Phone)

Florencio Lopez de Silanes

SKEMA Business School ( email )

Avenue Willy Brandt, Euralille
Lille, 59777
France

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Rafael Matta

SKEMA Business School - Université Côte d'Azur ( email )

60 rue Dostoïevski
Sophia Antipolis, 06902
France

HOME PAGE: http://https://sites.google.com/site/almeidadamatta/

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