Building Legal Indexes to Explain Recovery Rates: An Analysis of the French and UK Bankruptcy Codes

28 Pages Posted: 22 Sep 2011

See all articles by Régis Blazy

Régis Blazy

University of Strasbourg

Bertrand Chopard

University of Angers - Bureau of Economic Theory and Application (BETA)

Nirjhar Nigam

ICN BUSINESS SCHOOL

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Date Written: September 20, 2011

Abstract

In this paper, we test the characteristics of bankruptcy procedures that are likely to generate recoveries for the creditors. Such recoveries are related to the performance of bankruptcy law as they stem from the procedures’ ability to preserve the value of bankrupt firms, as basis of creditors’ repayment. We give elements of answer by taking into consideration two countries that are good representatives of the two main legal systems prevailing in Europe: France (Civil Law) and United Kingdom (Common Law).

In order to identify the characteristics of bankruptcy procedures that generate recoveries, we build 132 original legal indexes accounting for the main functions of bankruptcy law that were highlighted initially by Hart (2000). Namely, we measure the accessibility of the procedure, their ability to disclose public information, the level of protection of the debtor’s assets, the coordination of the claimants and their decision power under bankruptcy, and the sanction of faulty management. We show that the French procedures are more protective of the debtor’s assets and favor more the coordination of claims. In United-Kingdom, we find strong opposition between the liquidation and the reorganization procedures: the former ones prioritize the protection of secured claims, while unsecured creditors benefit from higher decision power under the latter ones.

We then use an original database of 833 French and UK bankrupt SMEs to measure the recovery rates that are generated by each procedure. By controlling for the value of assets, the structure of claims, the origins of default, and the firm characteristics, we first isolate the bankruptcy rules that are associated to higher recovery rates: namely, accessibility of the procedure, protection of the debtor’s assets, protection and coordination of claims. On the contrary, information disclosure under bankruptcy has negative impact on total recoveries, probably due to the breach in confidentiality. Last, some bankruptcy rules are not significantly related to recoveries, especially the severity towards faulty management.

Keywords: bankruptcy, recoveries, legal indexes

JEL Classification: G33, K22

Suggested Citation

Blazy, Régis and Chopard, Bertrand and Nigam, Nirjhar, Building Legal Indexes to Explain Recovery Rates: An Analysis of the French and UK Bankruptcy Codes (September 20, 2011). Midwest Finance Association 2012 Annual Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1931103 or http://dx.doi.org/10.2139/ssrn.1931103

Régis Blazy (Contact Author)

University of Strasbourg ( email )

61, avenue de la foret noire
Strasbourg, Alsace 3000
France

Bertrand Chopard

University of Angers - Bureau of Economic Theory and Application (BETA) ( email )

13, Place Carnot
Strasbourg, 67000
France

Nirjhar Nigam

ICN BUSINESS SCHOOL ( email )

13 rue Michel Ney
Nancy, 54000
France

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