Measuring the Ex-Ante Incentive Effects of Bankruptcy Reorganization Procedures

59 Pages Posted: 14 Aug 2019 Last revised: 23 Sep 2019

See all articles by Ashwini K. Agrawal

Ashwini K. Agrawal

London School of Economics & Political Science (LSE)

Juanita Gonzalez-Uribe

London School of Economics & Political Science (LSE) - Department of Finance

Jimmy Martinez-Correa

Copenhagen Business School - Department of Economics

Date Written: August 6, 2019

Abstract

The recent wave of corporate liquidations across Europe has led the European Commission to adopt bankruptcy reforms that grant debt holders greater powers during reorganization, mirroring recent trends in U.S. Chapter 11. Critics claim that these procedures fail to curb liquidations because too few insolvent firms use these procedures and emerge as going concerns. We argue that this perspective is misleading, because it fails to account for the ex-ante incentive effects of these rules on solvent firm debt and equity holders. We use administrative microdata to show that similar reforms to Danish bankruptcy reorganization actually led to a significant decline in liquidations. While few insolvent firms file for reorganization, solvent firms show significant improvements in financial management. The findings shed light on the causal effects of recent trends in bankruptcy reorganization procedures in the EU and U.S.

Keywords: Bankruptcy, Insolvency, Financial Distress, Chapter 11, Reorganization, Restructuring, Liquidation

JEL Classification: G00, G30, G33, G38, G01

Suggested Citation

Agrawal, Ashwini K. and Gonzalez-Uribe, Juanita and Martinez-Correa, Jimmy, Measuring the Ex-Ante Incentive Effects of Bankruptcy Reorganization Procedures (August 6, 2019). Available at SSRN: https://ssrn.com/abstract=3435653 or http://dx.doi.org/10.2139/ssrn.3435653

Ashwini K. Agrawal (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Juanita Gonzalez-Uribe

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom
+442074057686 (Phone)

Jimmy Martinez-Correa

Copenhagen Business School - Department of Economics ( email )

Denmark

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