Dissecting Bankruptcy Frictions

71 Pages Posted: 20 May 2019 Last revised: 2 Oct 2020

See all articles by Winston Dou

Winston Dou

The Wharton School, University of Pennsylvania

Lucian A. Taylor

University of Pennsylvania - The Wharton School

Wei Wang

Queen's University - Smith School of Business

Wenyu Wang

Indiana University - Kelley School of Business - Department of Finance

Date Written: October 2, 2020

Abstract

How efficient is corporate bankruptcy in the U.S.? Two economic frictions, asymmetric information and conflicts of interest among creditors, can cause several inefficiencies: excess liquidation, excess continuation, and excess delay. We quantify these inefficiencies and their underlying causes using a structural estimation approach. We find that the bankruptcy process is quite inefficient, mainly due to excess delay. Eliminating information asymmetries would increase average total payouts by 4%, and eliminating conflicts of interest would increase them by an additional 18%. Without these frictions, an extra 14% of cases would be resolved before going to court, and the remaining court cases would be 73% shorter. With less delay, bankruptcy's indirect costs would be much lower. In contrast, we find that inefficiencies from excess liquidation and excess continuation are quite small.

Keywords: Bankruptcy, structural estimation, conflicts of interest, asymmetric information

Suggested Citation

Dou, Winston and Taylor, Lucian A. and Wang, Wei and Wang, Wenyu, Dissecting Bankruptcy Frictions (October 2, 2020). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: https://ssrn.com/abstract=3383837 or http://dx.doi.org/10.2139/ssrn.3383837

Winston Dou (Contact Author)

The Wharton School, University of Pennsylvania ( email )

2318 Steinberg Hall - Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

Lucian A. Taylor

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

HOME PAGE: http://finance.wharton.upenn.edu/~luket/

Wei Wang

Queen's University - Smith School of Business ( email )

Queen's University-Smith School of Business
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Wenyu Wang

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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