Financial distress, bankruptcy law and the business cycle

Suárez, Javier; Sussman, Oren

doi:10.1007/s10436-006-0056-9

Cited by 26 publications

(17 citation statements)

References 13 publications

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“…13). These results are consistent with the findings of Suarez and Sussman (2007) that a softening in bankruptcy laws ensures a faster growth at the expense of long term stability. The degree of uncertainty in the present model can be quantified by the parameter a, which measures the reactions of firms to market expectations, and by the possible changes in investor strategies, captured by the distribution of n c .…”

Section: Dynamics and Policy Indicationssupporting

confidence: 95%

The financial instability hypothesis: A stochastic microfoundation framework

Chiarella

Guilmi

2011

Journal of Economic Dynamics and Control

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a b s t r a c tThis paper examines the dynamics of financial distress and in particular the mechanism of transmission of shocks from the financial sector to the real economy. The analysis is performed by representing the linkages between microeconomic financial variables and the aggregate performance of the economy by means of a microfounded model with firms that have heterogeneous capital structures. The model is solved both numerically and analytically, by means of a stochastic approximation that is able to replicate quite well the numerical solution. These methodologies, by overcoming the restrictions imposed by the traditional microfounded approach, enable us to provide some insights into the stabilization policies which may be effective in a financially fragile system.

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Section: Dynamics and Policy Indicationssupporting

confidence: 95%

The financial instability hypothesis: A stochastic microfoundation framework

Chiarella

Guilmi

2011

Journal of Economic Dynamics and Control

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“…While our results support Shleifer and Vishny (1992), they are not necessarily in conflict with Suarez and Sussman (2007) either. First, our tests may not fully capture the long term effects of the changes.…”

Section: Robustness Checkscontrasting

confidence: 51%

“…This view is challenged by Suarez and Sussman (2007). Their model implies that softening of bankruptcy law fails to produce the desired effect of increased long-term financial stability.…”

Section: Macroeconomic Effectsmentioning

confidence: 92%

“…The basic insight arising from the recent literature (see e.g. Honohan and Klingebiel, 2003, Kane and Klingebiel, 2004, and Suarez and Sussman, 2007 is that the potential positive short-term effects of a soft approach towards banks and their borrowers are countered by detrimental long-term effects. However, in an influential contribution Shleifer and Vishny (1992) suggest that a bankruptcy law that stipulates an automatic liquidation upon default would have detrimental long-term macroeconomic effects, since during economic crises liquidated assets are likely to sell at a deep discount.…”

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confidence: 99%

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Phoenix rising: Legal reforms and changes in valuations in Finland during the economic crisis

Korkeamäki

Koskinen

Takalo

2007

Journal of Financial Stability

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Finland experienced an extremely severe economic depression in the early 1990s. As a part of the government's crisis management policies, significant new legislation was passed that increased supervisory powers of financial market regulators and reformed bankruptcy procedures significantly decreasing the protection of creditors. We show that the introduction of these new laws resulted in positive abnormal stock returns. The new laws also lead to increases in firms' Tobin's q, especially for more levered firms. In contrast to previous studies, our results also suggest that public supervision of financial markets fosters rather than hampers financial market development. AbstractFinland experienced an extremely severe economic depression in the early 1990s. As a part of the government's crisis management policies, significant new legislation was passed that increased supervisory powers of financial market regulators and reformed bankruptcy procedures significantly decreasing the protection of creditors. We show that the introduction of these new laws resulted in positive abnormal stock returns. The new laws also lead to increases in firms' Tobin's q, especially for more levered firms. In contrast to previous studies, our results also suggest that public supervision of financial markets fosters rather than hampers financial market development. JEL Classification: G34, K22

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“…In our model the degree of the transmission of stock price variation is the main mechanism. The impact of bankruptcy law on business cycles is addressed by Suarez and Sussman (2007). They find that more firm friendly laws, that is a higher chance of not being declared bankrupt, has a possible adverse long-term effect.…”

Section: Introductionmentioning

confidence: 99%

Stock Price Related Financial Fragility and Growth Patterns

Aßmuth

2015

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in Stock price related financial fragility and growth patternsPascal Aßmuth AbstractThe total output of an economy usually follows cyclical movements which are accompanied by similar movements in stock prices. The common explanation relies on the demand side. It points out that stock market wealth drives consumption which triggers production afterwards. This paper focuses on influences via the supply side of the economy. The aim of the paper is to explore channels where stock price patterns influence the amount of credit taken by firms. The author examines trend and volatility cycles on the stock market. There are three channels addressed: the stock market valuation as piece of information for the assessment of a firm's creditworthiness, the influence on restructuring prospects in times of financial distress and the stock market related remuneration of the top management affecting capital demand. He asks to which extent a channel may contribute to the stock price-output relation when there is mutual feedback. A model à la Delli Gatti et al. (A new approach to business fluctuations: heterogeneous interacting agents, scaling laws and financial fragility, 2005) drives the results. Firms take credit to finance their production which determines their financial fragility. If their stochastic revenue is too low, they are bankrupt and leave the economy. The capital loss hurts the bank's equity base and future credit supply is diminished. This causes business cycles. Results show that if the bank assesses creditworthiness according to the stock price then idiosyncratic stock price fluctuations have only a slight effect as they disturb selection and hinder growth. If stock market optimism matters for bankruptcy ruling the level of stock owners' influence does not matter. If optimism is wide spread among stock investors however, investment behaviour is also correlated through the stock prices and this results in huge real economy cycles without any long-term growth. If volatility is considered in the decision of managers they act more prudently and this fosters growth.(Published in Special Issue Agent-based modelling and complexity economics) JELE32 G30 C63

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Financial distress, bankruptcy law and the business cycle

Abstract: Bankruptcy law, Business cycles, Financial distress, Liquidation, E32, E44, G33,

Cited by 26 publications

References 13 publications

The financial instability hypothesis: A stochastic microfoundation framework

The financial instability hypothesis: A stochastic microfoundation framework

Phoenix rising: Legal reforms and changes in valuations in Finland during the economic crisis

Stock Price Related Financial Fragility and Growth Patterns

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