Measuring the Ex-Ante Incentive Effects of Bankruptcy Reorganization Procedures
59 Pages Posted: 14 Aug 2019 Last revised: 23 Sep 2019
Date Written: August 6, 2019
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: Suggested Citation