What Discount Rate Should Bankruptcy Judges Use? Estimates from Canadian Reorganization Data

16 Pages Posted: 5 Oct 2008

See all articles by Fabrice Barthélémy

Fabrice Barthélémy

University of Cergy-Pontoise - THEMA

Timothy C. G. Fisher

University of Sydney, School of Economics

Jocelyn Martel

ESSEC Business School

Date Written: September 30, 2008

Abstract

Using data from financial reorganization plans filed by insolvent Canadian firms, we estimate the discount rate implicit in the unsecured creditor's reorganization decision. Using (HARA) utility functions, we find the implicit monthly discount rate of creditors to be 4.9%, which corresponds to an annual discount rate of 77%. This is 7 to 10 times more than the discount rates used in previous empirical studies of reorganization. The discount rate estimates are robust to varying degree of risk aversion and market to book value ratio of assets.

Keywords: Bankruptcy, Reorganization, Discount Rate

JEL Classification: G33, G38

Suggested Citation

Barthélémy, Fabrice and Fisher, Timothy C. G. and Martel, Jocelyn, What Discount Rate Should Bankruptcy Judges Use? Estimates from Canadian Reorganization Data (September 30, 2008). International Review of Law and Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=988360

Fabrice Barthélémy

University of Cergy-Pontoise - THEMA ( email )

33 boulevard du port
F-95011 Cergy-Pontoise Cedex, 95011
France

Timothy C. G. Fisher

University of Sydney, School of Economics ( email )

Sydney
Australia

Jocelyn Martel (Contact Author)

ESSEC Business School ( email )

Avenue Bernard Hirsch B.P. 50105
Cergy-Pontoise, 95021
France
33 1 34 43 33 21 (Phone)

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