The Privatization of Bankruptcy: Evidence from Financial Distress in the Shipping Industry

62 Pages Posted: 7 Dec 2016 Last revised: 15 Apr 2020

See all articles by Julian R. Franks

Julian R. Franks

London Business School - Institute of Finance and Accounting; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Gunjan Seth

London Business School

Oren Sussman

European Corporate Governance Institute (ECGI); University of Oxford - Said Business School; Ben-Gurion University of the Negev; University of London; University of Oxford - Said Business School

Vikrant Vig

London Business School

Date Written: May 1, 2017

Abstract

A generally accepted view is that sophisticated bankruptcy procedures are required to mitigate coordination failures and fire sale discounts arising from financial distress. In this paper, we study an industry not subject to mandatory bankruptcy procedures; instead, the shipping industry has relied on privately negotiated contracts, and not on sovereign procedures, like the US Chapter 11. We describe how loan contracts, and private institutions including competition between ports, have adapted to mitigate the costs of distress. We find low levels of coordination failures and fire sale discounts of 11% on the sale of arrested ships. Both the direct and indirect costs of distress are no larger than those reported for US bankruptcy procedures.

Keywords: Bankruptcy, Shipping, Freedom of Contracting, Fire Sales

JEL Classification: G33, L33, G23

Suggested Citation

Franks, Julian R. and Seth, Gunjan and Sussman, Oren and Vig, Vikrant, The Privatization of Bankruptcy: Evidence from Financial Distress in the Shipping Industry (May 1, 2017). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 505/2017, Available at SSRN: https://ssrn.com/abstract=2880751 or http://dx.doi.org/10.2139/ssrn.2880751

Julian R. Franks

London Business School - Institute of Finance and Accounting ( email )

Institute of Finance and Accounting
Sussex Place - Regent's Park
London NW1 4SA
United Kingdom
+44 20 7262 5050 x3449 (Phone)
+44 20 7724 3317 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
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Belgium

HOME PAGE: https://ecgi.global/

Gunjan Seth

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Oren Sussman

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 1865 288 926 (Phone)
+44 1865 288 805 (Fax)

Ben-Gurion University of the Negev

1 Ben-Gurion Blvd
Beer-Sheva 84105, 84105
ISRAEL

University of London ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

University of Oxford - Said Business School ( email )

Park End Street
Oxford, OX1 1HP
Great Britain
+44 1865 288 926 (Phone)
+44 1865 288 805 (Fax)

Vikrant Vig (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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