A Study of Inefficient Going Concerns in Bankruptcy

48 Pages Posted: 13 Sep 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)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2005

Abstract

This paper provides the first large-scale study measuring the bias in favor of going concerns induced by court-administered bankruptcy procedures. Although we find that the large majority of bankrupt firms in our sample of Hungarian firms are kept as going concerns, the evidence suggests that the going concern bias sharply reduces aggregate proceeds to pre-bankruptcy creditors. The high costs are accompanied by the eventual closure and piecemeal sale of three quarters of going concerns. These results arise because of poor court oversight and the compensation scheme awarded to the court appointed trustee managing the bankrupt company. Comparisons with other bankruptcy codes suggest that the application of the code and court procedures have an important impact on outcomes, including the degree of inefficiency.

Keywords: Allocation of control rights, bankruptcy code, compensation, recovery rates

JEL Classification: G21, G30, G33

Suggested Citation

Franks, Julian R. and Loranth, Gyongyi, A Study of Inefficient Going Concerns in Bankruptcy (May 2005). CEPR Discussion Paper No. 5035. Available at SSRN: https://ssrn.com/abstract=774146

Julian R. Franks (Contact Author)

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

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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