Are Longer Bankruptcies Really More Costly?

48 Pages Posted: 16 Mar 2006

See all articles by Daniel M. Covitz

Daniel M. Covitz

Board of Governors of the Federal Reserve System

Song Han

Board of Governors of the Federal Reserve System

Beth Anne Wilson

Board of Governors of the Federal Reserve System

Abstract

We test the widely held assumption that longer restructurings are more costly. In contrast to earlier studies, we use instrumental variables to control for the endogeneity of restructuring time and creditor return. Instrumenting proves critical to our finding that creditor recovery rates increase with duration for roughly 1½ years following default, but decrease thereafter. This, and similar results using the likelihood of reentering bankruptcy, suggest that there may be an optimal time in default. Moreover, the default duration of almost half of our sample is well outside the optimal default duration implied by our estimates. We also find that creditors benefit from more experienced judges and from oversight by only one judge. The results have implications for the reform and design of bankruptcy systems.

Keywords: Bankruptcy cost, bankruptcy reorganization, recovery rate, credit risk

JEL Classification: G12, G14, G33, G34

Suggested Citation

Covitz, Daniel M. and Han, Song and Wilson, Beth Anne, Are Longer Bankruptcies Really More Costly?. FEDS Working Paper No. 2006-27, Available at SSRN: https://ssrn.com/abstract=891486 or http://dx.doi.org/10.2139/ssrn.891486

Daniel M. Covitz

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-5267 (Phone)
202-452-5295 (Fax)

Song Han (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-736-1971 (Phone)
202-452-3891 (Fax)

Beth Anne Wilson

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
157
Abstract Views
2,014
rank
260,281
PlumX Metrics