Measuring the Effectiveness of Bankruptcy Institutions: Filtering Failures in Slovenian Financial Reorganizations
29 Pages Posted: 29 May 2018
Date Written: May 21, 2018
We examine micro-level data on Slovenian court-supervised financial reorganizations in order to provide a rare empirical insight into the effectiveness of bankruptcy institutions at fulfilling their primary role: encouraging the liquidation of non-viable firms and promoting the restructuring of viable firms. Under the Slovenian simplified financial reorganization procedure, firms with rejected reorganization proposals are not legally mandated to liquidate. Because we are able to track the fate of all firms attempting this mode of reorganization, we observe both the liquidation or further reorganization of firms with accepted proposals and the survival of firms with rejected proposals. To estimate the occurrence of filtering errors, we draw on two complementary approaches proposed in the literature. Based on ex-post conceptualization of firm viability, we find that Type I errors (acceptances of plans by non-viable firms) are more likely than Type II errors (rejections of plans by viable firms) and that the incidence of filtering failure is 27 percent. Based on ex-ante conceptualization of firm viability, our results imply that for a given reduction in Type II errors Slovenian creditors are on average willing to accept three times as many Type I errors.
Keywords: bankruptcy institutions, reorganization, filtering failure, measurement, Slovenia
JEL Classification: D02, G33, P34, K22
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