Legal Reform and Aggregate Small and Micro Business Bankruptcy Rates: Evidence from the 1997 Belgian Bankruptcy Code
40 Pages Posted: 1 Jun 2006 Last revised: 17 Sep 2015
Date Written: March 2007
Many Continental European countries recently reformed their bankruptcy legislations to stimulate reorganization and firm survival. We show that the Belgian 1997 bankruptcy code reform, which implemented several international best practice recommendations, significantly reduced aggregate small and micro business bankruptcy rates. However, using distributed lag models to control for the relationship between bankruptcy rates and macroeconomic variables such as real GDP growth, consumer confidence, inflation, etc., we find that the new code's impact is not the same for all types of companies. Specifically, while the beneficial effect of the reform is largely similar between small firms (i.e. stock corporations) and micro firms (i.e. partnerships), it is only significant in certain industries (manufacturing and trade). Overall, our results indicate that solely the reforms aimed at limiting domino bankruptcy effects have had a substantial impact. Our findings have several policy implications for the evaluation and modification of the bankruptcy system.
Keywords: Bankruptcy reform, Aggregate bankruptcy rates
JEL Classification: G33, E32, K22
Suggested Citation: Suggested Citation