A Study of Inefficient Going Concerns in Bankruptcy

45 Pages Posted: 26 Mar 2005

See all articles by Julian R. Franks

Julian R. Franks

London Business School - Institute of Finance and Accounting; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Gyongyi Loranth

Centre for Economic Policy Research (CEPR)

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Abstract

This paper provides the first large-scale study measuring the bias in favour of going concerns induced by court-administered bankruptcy procedures. Although we find that the large majority of bankrupt firms in our sample are kept as going concerns, the evidence suggests that they sharply reduce aggregate proceeds to pre-bankruptcy creditors, and almost three quarters are eventually closed and sold piecemeal. These results arise because of the combination of poor court oversight and the compensation scheme awarded to the trustee, managing the bankrupt company. This suggests the particular architecture of court-administered codes can give rise to very different levels of inefficiency.

Keywords: G21, G30, G33

JEL Classification: G21, G30, G33

Suggested Citation

Franks, Julian R. and Loranth, Gyongyi, A Study of Inefficient Going Concerns in Bankruptcy. AFA 2006 Boston Meetings Paper. Available at SSRN: https://ssrn.com/abstract=685825 or http://dx.doi.org/10.2139/ssrn.685825

Julian R. Franks

London Business School - Institute of Finance and Accounting ( email )

Institute of Finance and Accounting
Sussex Place - Regent's Park
London NW1 4SA
United Kingdom
+44 20 7262 5050 x3449 (Phone)
+44 20 7724 3317 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Gyongyi Loranth (Contact Author)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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