What Discount Rate Should Bankruptcy Judges Use? Estimates from Canadian Reorganization Data
16 Pages Posted: 5 Oct 2008
Date Written: September 30, 2008
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: Suggested Citation