Evidence that Differences in Bankruptcy Law Among Countries Affect Equity Returns

Abstract

We provide the first empirical evidence that differences in firm equity returns are correlated with differences in bankruptcy code among six of the G-7 countries (Canada, France, Germany, Great Britain, Japan and the U.S.). We document patterns in both filing data and equity returns for a sample of bankrupt firms in these countries and tie these to differences and similarities in law. We find evidence of both intra- and inter-country factors that affect returns for bankrupt firms, though our results suggest that both categories of factors are unsystematic in an ex ante pricing sense. Among our more striking findings are that British firms lose 89% of equity value in the three years prior to a bankruptcy filing and the loss occurs quickly. In contrast, U.S. firms lose 61% and lose it much more slowly. Patterns in France are largely unrelated to other countries, which we believe occurs because of the emphasis on protecting labor. Firms in Japan and Germany lose 77% of equity value and are highly correlated with each other, which appears to be an outgrowth of the similarity in the interlocking relationships between banks and firms in both countries. Finally, Canadian firms drop 84% in value, second only to Britain, but have important similarities to the other countries. These findings have important implications for financing choices that firms make in these countries, and for the development of capital markets, generally. They also provide important information to consider as the European Union moves towards developing common bankruptcy policies.

Keywords: Financial Distress Reorganization Liquidation Bankruptcy International Bankruptcy Law International Comparisons

JEL Classification: G33, G15