The Costs of Corporate Bankruptcy: A U.S.-European Comparison
Posted: 4 Oct 1999
Date Written: August 1994
Both Britain and France have adopted new bankruptcy/ insolvency laws since 1985 and a new bankruptcy law has also been proposed in Germany. Bankruptcy laws in the three European countries have traditionally been oriented toward liquidation, but the new laws move in the direction of allowing reorganization in some circumstances. This paper has several purposes. First, it identifies and compares basic differences in bankruptcy procedures in the four countries. Second, the costs (losses in economic efficiency) attributable to bankruptcy are identified. Bankruptcy costs incurred before it is known whether firms will be financially distressed are shown likely to be more important determinants of whether bankruptcy policy is economically efficient than bankruptcy costs incurred after firms have become financially distressed and/or have filed for bankruptcy. Third, the costs of bankruptcy under the laws of the four countries-- as well as under various proposed bankruptcy reforms--are analyzed. The analysis suggests that bankruptcy costs incurred before it is known whether firms will be financially distressed are likely to pull bankruptcy policy in the opposite direction from costs incurred after firms become financially distressed. As a result, it is impossible to determine from theory whether the more liquidation-oriented bankruptcy policies of the European countries or the more reorganization-oriented policy of the U.S. is more economically efficient.
JEL Classification: G33, G38, K29
Suggested Citation: Suggested Citation