Bankruptcy Around the World: Explanations of its Relative Use

44 Pages Posted: 24 Jun 2003

See all articles by Stijn Claessens

Stijn Claessens

Bank for International Settlements (BIS)

Leora F. Klapper

World Bank; World Bank - Development Research Group (DECRG)

Date Written: July 2003

Abstract

The recent literature on law and finance has drawn attention to the importance of creditor rights in influencing the development of financial systems and in affecting firm corporate governance and financing patterns. Recent financial crises have also highlighted the importance of insolvency systems to resolve corporate sector financial distress. The literature and crises have emphasized the complex role of creditor rights, affecting not only the efficiency of ex-post resolution of distressed corporations, but also influencing ex-ante risk-taking incentives and an economy's degree of entrepreneurship more generally.

Claessens and Klapper document how often bankruptcy is actually being used for a panel of 35 countries. Next they investigate the effects of specific design features of insolvency regimes in relation to the quality of the countries' overall judicial systems on the use of bankruptcy.

The authors find, correcting for overall financial development and macroeconomic shocks, that bankruptcies are higher in Anglo-Saxon countries and in market-oriented financial systems characterized by weaker and multiple banking relationships. They also find that greater judicial efficiency is associated with more use of bankruptcy, but that the combination of stronger creditor rights with greater judicial efficiency leads to less use. The authors find that the presence of a "stay on assets" leads to fewer bankruptcies independent of the efficiency of the judicial system. These findings suggest that there are important incentive effects of insolvency systems encouraging less risky behavior and more out-of-court settlements.

This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to understand corporate bankruptcy. The authors may be contacted at stijn@fee.uva.nl or lklapper@worldbank.org.

JEL Classification: G33, G38, K40, O16

Suggested Citation

Claessens, Stijn and Klapper, Leora F., Bankruptcy Around the World: Explanations of its Relative Use (July 2003). World Bank Policy Research Working Paper No. 2865. Available at SSRN: https://ssrn.com/abstract=405240

Stijn Claessens (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Leora F. Klapper

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States
202-473-8738 (Phone)

HOME PAGE: http://econ.worldbank.org/staff/lklapper

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

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