Measuring the Ex-Ante Incentive Effects of Creditor Control Rights During Bankruptcy Reorganization

67 Pages Posted: 14 Aug 2019 Last revised: 29 Jun 2021

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; Danish Finance Institute

Date Written: April 11, 2021

Abstract

A large theoretical literature studies the effects of creditor control during bankruptcy proceedings on firm outcomes. Empirical work in this area mainly examines reforms to creditor control rights during liquidation. In this paper, we use administrative microdata and exploit a legal reform in Denmark, to provide the first causal estimates of creditor empowerment in reorganization—the complementary bankruptcy procedure to liquidation. We find that the Danish reform led to a sharp decline in liquidations. Although few insolvent firms make use of the new reorganization procedures, we show that solvent firms improved their financial management and increased employment and investment. The findings illustrate the empirical importance of reorganization rules on the incentives of stakeholders outside of bankruptcy.

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 Creditor Control Rights During Bankruptcy Reorganization (April 11, 2021). 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

Danish Finance Institute ( email )

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