The Bankruptcy Decision: Empirical Evidence from Canada
30 Pages Posted: 21 Dec 2000
Date Written: November 2000
While the bankruptcy framework introduced in the seminal work of Bulow and Shoven and extended by White has been the foundation for theoretical work in the area for the last 20 years, it has never been empirically tested. The aim of the paper is to examine empirically the Bulow-Shoven-White framework using micro data on 810 bankrupt firms in Canada. Results are generally supportive of the Bulow-Shoven-White framework: the probability of reorganization increases with the level of free assets and the amount of debt reduction while it decreases with the level of unsecured debt. Results also show that the Bulow-Shoven-White framework does not provide a complete picture of the firm's bankruptcy decision. In particular, the relative size of government claims, the legal form of the firm, and the asset/debt ratio are also significant determinants of the bankruptcy decision.
Keywords: Bankruptcy, reorganization, insolvency
JEL Classification: G33, G38
Suggested Citation: Suggested Citation