1. Doing Business and related research

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 study the impact of different bankruptcy laws in general equilibrium, taking into account the interactions between the credit and labour markets, as well as wealth heterogeneity. Soft bankruptcy laws often preclude liquidation, to avoid ex-post inefficiencies. This worsens credit rationing, depresses investment and reduces aggregate leverage. Yet, tough laws do not necessarily maximize social welfare or emerge from the legislative process. Relatively rich agents can invest irrespective of the law. They favour soft laws that exclude poorer entrepreneurs from the market and thus reduce labour demand and wages. This raises the pledgeable income of the entrepreneurs who still can raise funds, and thus lowers their liquidation rates and the associated inefficiencies. Hence, a soft law can maximize social welfare.

  • Insolvency reform for credit, entrepreneurship, and growth

    Author(s) : Menezes and Antonia Preciosa 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.

  • 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.

  • Insolvency Resolution and the Missing High-Yield Bond Markets

    Author(s) : Becker, Bo, and Jens Josephson Journal : The Review of Financial Studies 29(10): 2814-49 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

  • 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.

  • Cross-border alliances and risk management

    Author(s) : Bodnaruk, A., A. Manconi and M. Massa Journal : Journal of International Economics Abstract : We study U.S. firms' foreign expansion choices, and investigate alliances as risk management devices used to mitigate partner risk. Firms venturing abroad are constrained by the availability of potential partners. One set of partners are foreign companies the firm shares the venture with (direct partners). The second set of partners is the institutions/government of the host country (indirect partners). Firms are more likely to choose alliances (over M&As) when indirect (direct) partner risk is high (low). The sensitivity to direct partner risk varies in the cross-section, and is weakened by financial constraints and greater ease of monitoring foreign partners.

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

    Author(s) : André Stel; David Storey; A. Thurik 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.

  • Do Reorganization Costs Matter for Efficiency? Evidence from a Bankruptcy Reform in Colombia

    Author(s) : Giné, Xavier, and Inessa Love Journal : The Journal of Law & Economics 53(4): 833-64 Abstract : An efficient bankruptcy system should liquidate nonviable businesses and reorganize viable ones. The importance of this filtering process has long been recognized in the literature; the typical reason advanced for its failure has been biases (in codes or among judges). In this paper we show that bankruptcy costs can be another source of such filtering failure. We illustrate this with the Colombian reform of 1999. Using data from 1,924 firms filing for bankruptcy between 1996 and 2003, we find that the prereform reorganization proceedings were so inefficient that the bankruptcy system failed to separate economically viable firms from inefficient ones. In contrast, by streamlining the reorganization process, the reform contributed to the improvement of the selection of viable firms into reorganization. In this sense, the new law increased the efficiency of the bankruptcy system in Colombia.

  • Saving Viable Businesses: the effect of insolvency reform

    Author(s) : Klapper, Leora Journal : World Bank Group Abstract : The 2008 financial crisis and consequent rise in corporate insolvencies highlight the clear need for efficient bankruptcy systems to liquidate unviable firms and reorganize viable ones and to do so in a way that maximizes the proceeds for creditors, shareholders, employees, and other stakeholders. This note summarizes the empirical literature on the effect of insolvency reforms on economic and financial activity. Overall, research suggests that effective reforms increase timely repayments, reduce the cost of credit, and lower the rate of liquidation among distressed firms.

  • How do bankruptcy laws affect entrepreneurship development around the world?

    Author(s) : Lee, Seung-Hyun, Yasuhiro Yamakawa, Mike W. Peng and Jay B. Barney Journal : Journal of Business Venturing Volume 26, Issue 5 (September 2011): 505–520 Abstract : How do bankruptcy laws as formal institutions affect entrepreneurship development around the world? Do entrepreneur-friendly bankruptcy laws encourage more entrepreneurship development at a societal level? We posit that if bankrupt entrepreneurs are excessively punished for failure, they may give up potentially high-return but inherently high-risk opportunities to start new businesses. Amassing a cross-country database from 29 countries spanning 19 years (1990–2008), we find that lenient, entrepreneur-friendly bankruptcy laws are significantly correlated with the level of entrepreneurship development as measured by the rate of new firm entry.

  • Bankruptcy Laws and Entrepreneur- Friendliness

    Author(s) : Peng, Mike W., Yasuhiro Yamakawa and Seung-Hyun Lee Journal : Entrepreneurship Theory and Practice, 34, 517 – 530 Abstract : Using bankruptcy laws as a case of formal institutions, we show how formal institutions impact entrepreneurship development. Historically, bankruptcy laws usually have been harsh. Recently, many governments have realized that entrepreneur–friendly bankruptcy laws can not only lower exit barriers, but also lower entry barriers for entrepreneurs. Since bankruptcy laws are not uniform around the world, it is important to understand how they differ in their friendliness to entrepreneurs. This article focuses on six dimensions of entrepreneur–friendliness: (1) the availability of a reorganization bankruptcy option, (2) the time spent on bankruptcy procedures, (3) the cost of bankruptcy procedures, (4) the opportunity to have a fresh start in liquidation bankruptcy, (5) the opportunity to have an automatic stay of assets during reorganization bankruptcy, and (6) the opportunity for entrepreneurs and managers to remain on the job after filing for bankruptcy. In an effort to cover both developed and emerging economies and to draw on geographically diverse examples, we use data from Australia, Canada, Chile, Finland, Hong Kong, Japan, Norway, Peru, Singapore, South Korea, Thailand, the United States, and other countries to illustrate these differences. Overall, this article contributes to the institution–based view of entrepreneurship by highlighting the important role that formal institutions such as bankruptcy laws play behind entrepreneurship development around the world.

  • 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.

  • Legal Reform and Loan Repayment: The Microeconomic Impact of Debt Recovery Tribunals in India

    Author(s) : Visaria, Sujata Journal : "American Economic Journal: Applied Economics 1(3): 59–81" Abstract : In 1993, the Indian government introduced debt recovery tribunals to speed up the resolution of debt recovery claims larger than a threshold. This paper exploits the staggered introduction of tribunals across states and the link between overdues and claim size to implement a differences-in-differences strategy on project loan data. It finds that the tribunals reduced delinquency for the average loan by 28 percent. They also lowered the interest rates charged on larger loans, holding constant borrower quality. This suggests that the speedier processing of debt recovery suits can lower the cost of credit. (JEL G21, K41, O16, O17)

  • A study of bankruptcy costs and the allocation of control

    Author(s) : Julian Franks and Gyongyi Loranth Journal : Review of Finance 18(3): 961-997 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. By 2004, more Americans were filing for bankruptcy each year than were graduating from college, getting divorced, or being diagnosed with cancer. In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) became law. It made bankruptcy law much less debtor-friendly. Personal bankruptcy filings fell to 600,000 in 2006. This paper explores why personal bankruptcy rates rose, and will argue that the main reason is the growth of "revolving debt" -- mainly credit card debt. It explains how the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 altered the conditions of bankruptcy. Finally, this essay considers the balances that need to be struck in a bankruptcy system and how the U.S. bankruptcy system strikes these balances in comparison with other countries. I argue that a less debtor-friendly bankruptcy policy should be accompanied by changes in bank regulation and truth-in-lending rules, so that lenders have a greater chance of facing losses when they supply too much credit or charge excessively high interest rates and fees.

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