Measuring the Ex-Ante Incentive Effects of Bankruptcy Reorganization Procedures

58 Pages Posted: 14 Aug 2019 Last revised: 17 Oct 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: October 12, 2019

Abstract

The EU’s 2019 Insolvency Directive increases debt holders’ control over bankruptcy reorganization proceedings, mirroring recent trends in U.S. Chapter 11. Critics, however, claim that too few insolvent firms use similar procedures to avoid liquidation. This view has remained unchallenged, as prior empirical work mostly studies reforms to liquidation proceedings, rather than reorganization alone. We argue that the critics’ perspective is misleading, because it ignores the rules’ ex-ante incentive effects on solvent firm debt and equity holders. We use administrative microdata to show that similar reforms to Danish bankruptcy reorganization actually caused a steep 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 changes to European bankruptcy law and U.S. Chapter 11.

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 (October 12, 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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