Are Longer Bankruptcies Really More Costly?

48 Pages Posted: 16 Mar 2006  

Daniel M. Covitz

Federal Reserve Board - Division of Research & Statistics

Song Han

Federal Reserve Board - Division of Research and Statistics

Beth Anne Wilson

Government of the United States of America - Division of International Finance (IFDP)

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

Federal Reserve Board - Division of Research & Statistics ( email )

20th and C Streets, NW
Mailstop 153
Washington, DC 20551
United States
202-452-5267 (Phone)
202-452-5295 (Fax)

Song Han (Contact Author)

Federal Reserve Board - Division of Research and Statistics ( email )

20th & C. St., N.W.
Washington, DC 20551
United States
202-736-1971 (Phone)
202-452-3891 (Fax)

Beth Anne Wilson

Government of the United States of America - Division of International Finance (IFDP) ( email )

20th St. and Constitution Ave.
Washington, DC 20551
United States

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