Research on Resolving Insolvency

Doing Business considers the following list of papers as relevant for research on resolving insolvency. Some papers—denoted with an asterisk (*)—use Doing Business data for their empirical analysis. If we've missed any important research, please let us know.

  • A study of bankruptcy costs and the allocation of control

    Author(s) : Julian Franks and Gyongyi Loranth Journal : The Review of Finance Abstract : This article studies how the allocation of control rights in bankruptcy influences outcomes. Using Hungarian data, we find that the large majority of bankrupt firms in our sample are maintained as going concerns despite the fact that these firms generate large operating losses and low recovery rates for pre-bankruptcy creditors. We trace the bias to the allocation of control rights between secured and unsecured creditors and the compensation scheme of the agent managing the bankruptcy process. Our findings shed light on a very important bankruptcy design question

  • Bankruptcy laws and debt renegotiation

    Author(s) : Ludek Kolecek Journal : Journal of Financial Stability, Volume 4, Issue 1, Pages 40-61, April 2008 Abstract : This paper analyzes the effect of the toughness of bankruptcy law on the number of liquidations in a simple model of borrowing and lending with asymmetric information, where the creditor cannot credibly commit to liquidate the firm if the default occurs. In our setting we consider a bankruptcy law to be a one-dimensional variable that influences creditor's expectation value of collateral. We find that there is an interval of the bankruptcy law, where the number of liquidations decreases in the toughness of the bankruptcy law. We also find that if the liquidation costs are high, softer bankruptcy law is preferred.

  • Bankruptcy reform and credit cards

    Author(s) : White, Michelle J Journal : Journal of Economic Perspectives, Volume 21, Issue 4, Pages 175-199, Fall 2007 Abstract : From 1980 to 2004, the number of personal bankruptcy filings in the United States increased more than five-fold, from 288,000 to 1.5 million per year. Lenders responded to the high filing rate with a major lobbying campaign for bankruptcy reform that led to the adoption in 2005 of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which made bankruptcy law much less debtor-friendly. The paper first examines why bankruptcy rates increased so sharply. I argue that the main explanation is the rapid growth in credit card debt, which rose from 3.2% of U.S. median family income in 1980 to 12.5% in 2004. The paper then examines how the adoption of BAPCPA changed bankruptcy law. Prior to 2005, bankruptcy law provided debtors with a relatively easy escape route from debt, since credit card debt and other types of debt could be discharged in bankruptcy and even well-off debtors had no obligation to repay. BAPCPA made this escape route less attractive by increasing the costs of filing and forcing some high-income debtors to repay from post-bankruptcy income. However, because many consumers are hyperbolic discounters, making bankruptcy law less debtor-friendly will not solve the problem of consumers borrowing too much. This is because, when less debt is discharged in bankruptcy, lending becomes more profitable and lenders increase the supply of credit. The paper examines the determinants of an optimal bankruptcy law. It also considers the relationship between bankruptcy law and regulation of lending behavior and discusses proposals that would reduce lenders' incentives to supply too much credit to debtors who are likely to become financially distressed.

  • Credit, wages, and bankruptcy laws

    Author(s) : Bruno Biais and Thomas Mariotti Journal : Journal of the European Economic Association, September 2009, Vol. 7, No. 5, Pages 939-973 Abstract : We analyze how bankruptcy laws affect the general equilibrium interactions between credit and wages. Soft laws reduce the frequency of liquidations and thus ex post inefficiencies, but they worsen credit rationing ex ante. This hinders firm creation and thus depresses labor demand. Rich agents who need few outside funds can invest even if creditor rights are weak. Hence, they favor soft laws that exclude poorer agents from the credit market and reduce the competition for labor. Such laws can generate greater utilitarian welfare than under perfect contract enforcement

  • Insolvency reform for credit, entrepreneurship, and growth

    Author(s) : Antonia Menezes (based upon research by Kristin van Zwieten, Clifford Chance, and T. Natalie Mrockova) Journal : Wordl Bank Journal of Public Policy Abstract : The willingness of banks and investors to support new businesses depends a great deal on the rules that govern failing businesses. Effective insolvency regimes save struggling firms when possible, or reallocate assets of failing firms more productively. These procedures?focused on the end of the business life cycle?have a profound impact on the beginning. Banks and investors are more willing to lend when they know they can recover at least some of their investment. Entrepreneurs are more willing to enter the market when they are not putting their entire personal fortunes at risk. This Viewpoint examines literature that quantifies the impact of effective insolvency regimes.

  • Legal reform and aggregate small and micro business bankruptcy rates: evidence from the 1997 Belgian bankruptcy code

    Author(s) : NicoDewaelheyns and CynthiaVanHulle Journal : Small Business Economics, Volume 31 (2008),Issue 4, December, Pages Abstract : 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 especially the measures taken to limit domino bankruptcy effects are likely to have had a substantial impact. Our findings have several policy implications for the evaluation and modification of the bankruptcy system.

  • Legal reform and loan repayment: the microeconomic impact of debt recovery tribunals in India

    Author(s) : Visaria, Surata Journal : American Economic Journal - Applied Economics, Volume 1, Issue 3, Pages 59-81, July 2009 Abstract : In 1993, the Indian government introduced debt recovery tribu-nals to speed up the resolution of debt recovery claims larger thana threshold. This paper exploits the staggered introduction of tri-bunals across states and the link between overdues and claim sizeto implement a differences-in-differences strategy on project loandata. It finds that the tribunals reduced delinquency for the averageloan by 28 percent. They also lowered the interest rates charged onlarger loans, holding constant borrower quality. This suggests thatthe speedier processing of debt recovery suits can lower the cost ofcredit.

  • Strategic default and equity risk across countries

    Author(s) : Favara, Giovanni; Schroth, Enrique; Valta, Philip Journal : Journal of Finance, Volume 67, Issue 6, Pages 2051-2095, December 2012 Abstract : We show that the prospect of a debt renegotiation favorable to shareholders reduces the firms equity risk. Equity beta and return volatility are lower in countries where the bankruptcy code favors debt renegotiations and for firms with more shareholder bargaining power relative to debt holders. These relations weaken as the countrys insolvency procedure favors liquidations over renegotiations. In the limit, when debt contracts cannot be renegotiated, equity risk is independent of shareholders incentives to default strategically. We argue that these findings support the hypothesis that the threat of strategic default can reduce the firms equity risk.

  • The bankruptcy reform act of 2005 and entrepreneurial activity

    Author(s) : Paik, Yongwook Journal : Journal of Economics & Mangement Strategy, Volume 22, Issue 2, Pages 259-280, Summer 2013 Abstract : This paper empirically investigates the effect of the Bankruptcy Reform Act of 2005 on entrepreneurial activity. We find that this act had virtually no noticeable effect on the overall level of entrepreneurship, measured by self-employment, partly because potential entrepreneurs were more likely to seek limited liability to offset the reduction in wealth protection imposed by the new law. That is, the incorporation rate increased for small businesses after the new law was enacted. This increase emphasizes that limited liability provided by incorporation is an important strategic variable that potential entrepreneurs utilize in response to changes in personal bankruptcy law. This study implies that incorporation is an important parameter to consider in understanding the relationship between bankruptcy law and entrepreneurial activity. The policy implication of this study is that entrepreneurs do respond to changes in personal bankruptcy law, even though it is intended for consumers, so this potential side effect should be considered when designing a new law.

  • The Brazilian bankruptcy law experience

    Author(s) : Araujo, Aloisio P.; Ferreira, Rafael V. X.; Funchal, Bruno Journal : Journal of Corporate Finance, Volume 18, Issue 4, Pages 994-1004, September 2012 Abstract : In early 2005, the Brazilian Congress approved a new bankruptcy law. The new legislation increased creditor protection and improved the efficiency of the bankruptcy system. This paper evaluates the empirical consequences of a bankruptcy reform on a poorly developed credit market. Using data from Brazilian and non-Brazilian firms, we estimated, using two different models, the effect of the bankruptcy reform on contractual and non-contractual debt variables. In general, both models yielded similar results. Concerning contractual debt variables, we found a significant increase in the total amount and the long-term debt and a reduction in the cost of debt. For the non-contractual debt variable, we found no effect in the loans' ownership structure.

  • The costs of bankruptcy: chapter 7 liquidation versus chapter 11 reorganization

    Author(s) : Arturo Bris, Ivo Welch and Ning Zhu Journal : The Journal of Finance, Volume 61 Issue 3,Pages1253-1303, 2006 Abstract : Our paper explores a comprehensive sample of small and large corporate bankruptcies in Arizona and New York from 1995-2001. We find that bankruptcy costs are very heterogeneous and sensitive to measurement method. Still, Chapter 7 liquidations appear no faster or cheaper (in terms of direct expense) than Chapter 11 bankruptcies. But Chapter 11 seems to preserve assets better, and thereby allows creditors to recover relatively more. Our paper also provides a large number of further empirical regularities.

  • The effect of business regulations on nascent and young business entrepreneurship

    Author(s) : Andr<span style="background-color Journal : Small Business Economics, Springer, vol. 28(2), pages 171-186, March. Abstract : We examine the relationship, across 39 countries, between regulation and entrepreneurship using a new two-equation model. We find the minimum capital requirement required to start a business lowers entrepreneurship rates across countries, as do labour market regulations. However the administrative considerations of starting a business ? such as the time, the cost, or the number of procedures required ? are unrelated to the formation rate of either nascent or young businesses. Given the explicit link made by Djankov et al. (2002) between the speed and ease with which businesses may be established in a country and its economic performance ? and the enthusiasm with which this link has been grasped by European Union policy makers ? our findings imply this link needs reconsidering.

  • Corporate Insolvency Resolution in India: Lessons from a cross-country comparison

    Author(s) : Sengupta, Rajeswari; Sharma, Anjali Journal : MPRA Abstract : In this paper we analyse the corporate insolvency resolution procedures of India, UK and Singapore within a common framework of well-specified principles. India at present lacks a single, comprehensive law that addresses all aspects of insolvency of a firm. It has a multiple laws, regulations and adjudication fora, each of which have created opportunities for debtor firms to exploit the arbitrage between these to frustrate recovery efforts of creditors. This adversely affets the resolution process, the time to recovery and the value recovered. The importance of a comprehensive, well-functioning insolvency resolution framework has been documented in literature. In India, the Bankruptcy Law Reforms Committee (BLRC) was constituted in 2014 with the objective of proposing a comprehensive framework for resolving the insolvency of firms and individuals. We undertake a comparison of the corporate insolvency resolution framework in UK, Singapore and India, with the underlying motivation to highlight the similarities and differences across the laws, procedures and institutional context of the three countries. The objective of this comparison is to draw lessons for the Indian reform process, in context of the formation of the BLRC. The BLRC has recently proposed an Insolvency and Bankruptcy Bill (IBB) which has been presented in Parliament and is currently being deliberated upon by a Joint Parliamentary Committee

  • The Indian Insolvency and Bankruptcy Bill: A Squandered Opportunity

    Author(s) : Pandey, Ashish Journal : MPRA Abstract : In this perspective article, the author analyses the eventual efficacy of recently passed Insolvency and Bankruptcy Bill in India. The author ascertains that the Bill in its current form encourages liquidation at the cost of financial restructuring. An opinion is established based on secondary research that the Bill fails to provide adequate representation to certain key stakeholders. The author highlights a lack of clarity in the Bill regarding the appointment of executants. Certain lacunae in the Bill that may impede its overall effectiveness are explicitly identified. The issue of conflicts between various stakeholders is debated in the context of current Bill. The author draws upon cross-country experiences to suggest remedial measures that address current impediments in the successful implementation of the Bill.

  • Insolvency Regimes and Productivity Growth: A Framework for Analysis

    Author(s) : McGowan, Müge Adalet; Andrews, Dan Journal : OECD Economics Department Working Papers Abstract : This paper develops an analytical framework to identify the policies relevant for firm exit and the channels through which they shape aggregate productivity growth. A range of potentially relevant policies are identified, spanning insolvency regimes, regulations affecting product, labour and financial markets, macroeconomic policies, subsidies, taxation and environment regulations. These policies can directly shape aggregate productivity along the exit margin through a variety of channels, including the strength of market selection and the scope and speed at which scarce resources consumed by failing firms can be reallocated to more productive uses. However, since market imperfections often generate obstacles to the orderly exit of failing firms, the efficiency of insolvency regimes emerges as particularly crucial. Thus, the paper analyses corporate and personal insolvency regimes in terms of their goals, optimal design (including trade-offs) and key features relevant for explaining cross-country differences in productivity. Finally, the paper proposes a strategy to obtain policy indicators that better capture cross-country differences in the key design features of corporate and person.

  • Insolvency Resolution and the Missing High-Yield Bond Markets

    Author(s) : Becker, Bo Journal : The Review of Financial Studies Abstract : In many countries, poorly functioning bankruptcy procedures force viable but insolvent firms to restructure out of court, where banks may have a bargaining advantage over other creditors. We model the choice of restructuring process and derive implications for the corporate mix of bank and bond financing. Empirical patterns match the model

  • No Country for Young Firms? Start-up Dynamics and National Policies

    Author(s) : Calvino, Flavio; Criscuolo, Chiara; Menon, Carlo Journal : OECD Economics Department Working Papers Abstract : The paper provides new cross-country evidence on the links between national policies and the growth patterns of start-ups. In particular, it compares for the first time the heterogeneous effects of national policies on entrants and incumbents, within the same country, industry, and time period. A number of key facts emerge. First, start-ups in volatile sectors and in sectors that exhibit higher growth dispersion are significantly more exposed to national policies than start-ups in other sectors. Second, start-ups are systematically more exposed than incumbents to the policy environment and national framework conditions. Third, the results suggest that timely bankruptcy procedures and strong contract enforcement are key to establishing a dynamic start-up environment.

  • How Does Long-Term Finance Affect Economic Volatility?

    Author(s) : Demirgüç-Kunt, Asli; Horváth, Bálint L.; Huizinga, Harry Journal : World Bank Publications Abstract : This paper examines how the ability to access long-term debt affects firm-level growth volatility. The analysis finds that firms in industries with stronger preference to use long-term finance relative to short-term finance experience lower growth volatility in countries with better-developed financial systems, as these firms may benefit from reduced refinancing risk. Institutions that facilitate the availability of credit information and contract enforcement mitigate the refinancing risk and therefore growth volatility associated with short-term financing. Increased availability of long-term finance reduces growth volatility in crisis as well as non-crisis periods.

  • Innovation, Productivity, and Growth in Costa Rica; Challenges and Opportunities

    Author(s) : Monge-González, Ricardo Journal : IDB Publications Abstract : This technical note presents a detailed review of Costa Rica’s recent innovation policy. It discusses how far Costa Rica is from having innovation ecosystems (human networks that generate extraordinary creativity and output on a sustainable basis), and shows that the low innovative capacity of Costa Rican firms explains their low productivity, which in turn determines the moderate level of economic growth in the country. Among the main challenges that Costa Rica faces in moving toward an innovation-based economy, according to the evidence presented herein, is the low level of investment in research and development (R&amp;D). Strengthening Costa Rican innovation ecosystems, creating closer linkages between SMEs and large companies including multinationals, in addition to increasing the domestic value-added of SME exports, and reduction (or even better, elimination) of the principal obstacles to the growth of companies, must be part of an innovation policy agenda. Costa Rica’s economic success will depend on how well it can design and implement policies and programs that lead toward achievement of an innovation-driven economy in the near future.

  • Innovation, Productivity, and Growth in Costa Rica; Challenges and Opportunities

    Author(s) : Kant, Chander Journal : Journal of Policy Modeling Abstract : Economists have recently emphasized Solow growth factors, physical capital, labor, and technology (“proximate” causes) depend on fundamentals like geography, culture, and institutions. I consider one of these fundamentals, institutions, and analyze whether they are malleable by a contemporary economic variable, globalization. The globalization I consider is of production through multinational corporations. Using the recently available data on institutional quality for almost all countries, I show institutional quality is higher with a greater FDI presence in developing countries. Nevertheless, there is no statistically significant effect on the same institutional variablesin developed countries. By some measures, the income-gap between the rich and poor countries has worsened in the post-1950 period, and a consensus has emerged that poor institutions are to be blamed. A policy of encouraging FDI islikely to have the additional effect of improving institutions in developing countries and may have a greater potential to reduce income gaps than has been realized.

  • Structural reforms to boost inclusive growth in Greece

    Author(s) : Daude, Christian Journal : OECD Economics Department Working Papers Abstract : This paper takes stock of the main structural reforms that Greece has undertaken since 2010, those currently proposed and that are in the process of implementation, and quantifies the medium and long‑term effects on output. Special attention is given to three issues that are relevant to understanding reform dynamics in Greece

  • Boosting productivity through greater small business dynamism in Canada

    Author(s) : Carey, David; Lester, John; Luong, Isabelle Abstract : Small business dynamism is a feature of an SME sector that contributes to overall productivity growth, not an end in itself. Such dynamism increases productivity growth by reallocating resources towards more productive firms and strengthening the diffusion of new technologies. Small business dynamism in Canada has declined in recent decades, as in other OECD countries, but overall it remains in the middle of the range, with some indicators above average and others below. Framework economic policies are generally supportive of small business dynamism, especially labour regulation, but there is scope to reduce regulatory barriers to product market competition. Canada has many programmes to support small businesses. Some of the largest programmes are not well focused on reducing market failures. Focusing support more on reducing clear market failures would increase the contribution of these programmes to productivity growth and living standards. This would likely entail redirecting support from small businesses in general to start-ups and young firms with innovative projects, which would boost small business dynamism.