Dissecting Bankruptcy Frictions

60 Pages Posted: 20 May 2019 Last revised: 1 Nov 2019

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 29, 2019

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, the direct and indirect costs of bankruptcy 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 29, 2019). 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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