A Study of Inefficient Going Concerns in Bankrupty

Abstract

Using Hungarian data, this paper provides the first large-scale study measuring the bias in favour of inefficient going concerns induced by court-administered bankruptcy procedures. We find that the large majority of bankrupt firms in our sample are kept as going concerns, although the evidence suggests that they sharply reduce aggregate proceeds to pre-bankruptcy creditors. These results stem from bankruptcy law and practices that dilute rights of secured creditors, and provide the trustee managing the bankruptcy process with strong incentives to maintain a going concern. The bias in favour of going concerns encourages trade creditors to trigger bankruptcy, either to be bought out by secured creditors or to benefit from supplying the firm in bankruptcy.

Keywords: Bankruptcy code, control rights, recovery rates

JEL Classification: G21, G30, G34