Ex post efficiency of bankruptcy procedures: A general normative framework

Causes and resolution of bankruptcy: The efficiency of the law

“…More recently, following the arguments of White (1994), several authors have also associated the efficiency of the bankruptcy process in insolvent firms with its causes, that is, with the previous viability of the firm. They have tried to identify whether bankruptcy has its origin only in financial problems (financial bankruptcy) or in the operative results (economic bankruptcy) (Hotchkiss, 1995;Andrade and Kaplan, 1998;Blazy and Chopard, 2004;Denis and Rodgers, 2007;Lemmon et al, 2009;Balcaen et al, 2011;Fischer and Wahrenburgh, 2012). Specifically, Blazy and Chopard (2004) assert that "economically inefficient" failing firms should be liquidated while only "financial distressed" firms should be organized.…”

“…They have tried to identify whether bankruptcy has its origin only in financial problems (financial bankruptcy) or in the operative results (economic bankruptcy) (Hotchkiss, 1995;Andrade and Kaplan, 1998;Blazy and Chopard, 2004;Denis and Rodgers, 2007;Lemmon et al, 2009;Balcaen et al, 2011;Fischer and Wahrenburgh, 2012). Specifically, Blazy and Chopard (2004) assert that "economically inefficient" failing firms should be liquidated while only "financial distressed" firms should be organized. According to those authors, a firm is in economic distress if the net present value of assets is negative under any management team (it must be piecemeal liquidated) or positive under a different management team (it must be sold as a going concern).…”

“…For this reason, their continuation is doubtful, even without leverage (Lemmon et al, 2009;Balcaen et al, 2011). Blazy and Chopard (2004), Lemmon et al (2009) andFischer andWahrenburgh (2012) assert that if the bankruptcy is financial, firms have a greater likelihood of reorganization through an agreement with their creditors to repay their debts because the creditors have high expectations of results. However, firms in economic bankruptcy are more likely to be liquidated.…”

(Un)secured debt and the likelihood of court-supervised reorganization

“…First, the bankruptcy law may determine the respective weights given to secured and unsecured creditors (in amount/value) in the voting process, in order to influence the collective decision to adopt a reorganization plan. Further, the law (or bankruptcy Courts) may also allow for deviations from the absolute priority rule in order to redistribute a part of the liquidation value from secured creditors to unsecured creditors (Blazy and Chopard 2004). More extremely, secured creditors may become the residual claimants in continuation by giving them a part of equity of the reorganized firm (Bebchuk 1988;Aghion et al 1992Aghion et al , 1995.…”

Insolvency administrator’s incentives and the tradeoff between creditor satisfaction and efficiency in bankruptcy procedures

“…Further studies analyse the influence of biased judges (Bris et al 2005;Baird 1986) or the quality and judicial discretion of judges on the ex post outcome of a bankruptcy procedure (Ayotte and Yun 2007;Bernhardt and Nosal 2004). Another issue discussed in the literature is the conflict of interest among multiple creditors (Blazy and Chopard 2004) or the problems due to multiple classes of creditors (Bulow and Shoven 1978;White 1989;Gertner and Scharfstein 1991). This paper addresses the individual incentives of a better-informed insolvency administrator as an additional source of filtering failure.…”