Empirical Evidence on the Efficiency Cost of a Debtor-Friendly Bankruptcy System
43 Pages Posted: 5 Jul 2007 Last revised: 5 Oct 2011
Date Written: July 1, 2008
A 1992 change to the Canadian Law provides a natural experiment that can be used to evaluate the economic efficiency of a debtor-friendly bankruptcy regime like Chapter 11. Using two waves of data on firms attempting reorganization before and after the law change, we find that the more recent debtor-friendly law has resulted in a higher probability of failure, a longer time in reorganization and sharply rising costs to unsecured creditors. In particular, we find that an "exclusivity period" given to debtors in the new law - hitherto unavailable under Canadian law and a often criticized feature of Chapter 11 - plays an important role.
Keywords: economic efficiency, bankruptcy costs, reorganization, Chapter 11
JEL Classification: G33, L11
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