Bankruptcy Law Differences Across Countries, Managerial Incentives and Firm Value

Abstract

With a state preference model, we illustrate how differences in bankruptcy code across countries affect managerial incentives and firm value. We examine bankruptcy codes of the G-7 countries in some detail and tie differences to model outcomes. We substantiate the economic effect of these differences by contrasting outcomes of specific bankruptcies and with the pre-filing performance of bankrupt firms from different countries. We then use a constrained optimization model to show that code differences also affect managers of financially healthy firms. These code-induced incentives and empirical evidence raise implications for bankruptcy policies, financial research, and policies affecting economic growth.

Keywords: Financial Distress, Bankruptcy, International Bankruptcy Law, International Comparisons

JEL Classification: G33, G38, G30