How Do Bankruptcy Systems Perform in Eastern Europe?

Abstract

For post-socialist countries that have undertaken long phases of economic and judicial transitions, an important aspect of attractiveness is based on the performances of their bankruptcy systems. Those performances are all the more essential in a context of non-mature capital markets. Precisely, bankruptcy procedures should, first generate substantial recoveries for the whole set of investors, and second share those recoveries in an adequate way-e.g. in a way that improves the investors' individual incentives (in terms of monitoring, control, support, etc.). This article uses an original hand-collected database of 554 closed bankruptcy cases in three Eastern European countries (Hungary, Poland, and Romania) to evaluate the determinants of bankruptcy systems' performances during the post-transition era (from year 2003 to 2010/11). In particular, we investigate whether the specificities of these local bankruptcy environments are significant enough to influence the creditors' total recoveries. We also wonder whether those recoveries are impacted by the presence of private/public creditors and/or the concentration of their claims. This paper goes beyond a mere analysis of the creditors' overall repayment, by focusing on the competition effects between them. Implementing competition is actually a core issue for posttransition economies, which have to mimic rivalry effects that usually prevail in more mature market economies. Precisely, we measure the priority order of repayment among competing classes of creditors (public, social, and private claims) and investigate the nature of competition (rivalry vs. ripple effects) among these classes. (1) We first confirm that the design of bankruptcy law "matters": the creditors' repayment is not independent from the type of bankruptcy procedure, and depends on the national environment in which such procedure is engaged. (2) On all three countries, the total recoveries do not benefit from the presence of public claimholders, even when those are in position of being residual claimants. Following Satjer (2010), this result suggests some passivity from the state, which has lost bargaining power under bankruptcy. On the contrary, the private claimholders exert a contrasting influence on total recoveries: positive for the junior ones (more involved under bankruptcy, to compensate their lack of protection), and negative for the secured ones (confirming the "lazy argument" attached to collaterals). (3) We also find that repayments are lower when the claims are concentrated: despite easier coordination, concentration may generate excessive influence from the largest creditors, willing to run bankruptcy adjudication in their sole interests. (4) We show that the Eastern European bankruptcy systems provide stronger protection for private secured claims than for public claims. From that angle, the post-socialist economies mimic the prioritization of secured creditors that characterizes most Western European bankruptcy systems. (5) Last, we confirm that Eastern European bankruptcy systems h...

Debt Recovery in Firm Liquidations: Do Liquidation Trustees Matter?

“…Previous empirical research has persuasively demonstrated that ex-post efficiency of an insolvency regime is inter alia contingent on the choice of laws and procedures governing the proceedings (see, e.g., Armour et al 2008, Davydenko and Franks 2008, Haselmann et al 2010, Blazy et al 2013, Blazy and Stef 2015. Our analysis complements these findings by demonstrating that the ex-post efficiency of a given insolvency regime may also notably depend on who is entrusted with its administration.…”

“…the sum of payments to all creditors) after completion of the liquidation proceedings. After controlling for the total value of declared claims (see below), the total amount paid to creditors measures the expost efficiency of insolvency proceedings (see, e.g., Sundgren 1998, Thorburn 2000, Armour et al 2008, Davydenko and Franks 2008, Blazy et al 2013, Blazy and Stef 2015.…”

“…Yet detailed micro-level empirical evidence on the factors influencing the ex-post efficiency of insolvency regimes, especially those outside of the United States, is scant (Hotchkiss et al 2008: 38, Blazy et al 2011, 2013: 1937Sundgren 1998, Couwenberg and de Jong 2008, Dewaelheyns and Van Hulle 2009, Leyman et al 2011 Systematic empirical analyses of bankruptcy regimes are especially scarce in the context of postsocialist and emerging-market economies (e.g., Blazy and Stef 2015, Lambert-Mogiliansky et al 2007, Vukelic et al 2014, Knot and Vychodil 2006, even though the design of effective bankruptcy institutions and procedures was identified as a policy priority during transition (see, e.g., Aghion et al 1994, Estrin 2000, Pistor 2000, Csaki 2002) and continues to be an important 1 In contrast, the literature on the ex-ante incentive effects of bankruptcy has been comparatively voluminous (for references, see, e.g., Hotchkiss et al 2008: fn. 1). 3 policy concern in current reform debates worldwide (see, e.g., Cirmizi et al 2012, Claessens et al 2001.…”

“…In this paper, we fill the abovementioned gap in the literature by studying the determinants of debt recovery, a common measure of ex-post efficiency of insolvency proceedings (see, e.g., Blazy and Stef 2015, 2013Thorburn 2000, Couwenberg and de Jong 2008, Armour et al 2008, in firm liquidations in the post-socialist EU member state of Slovenia. Scarce previous micro-level studies on the predictors of debt recovery have examined the importance of bankruptcy laws (see, e.g., Armour et al 2008, Davydenko and Franks 2008, Haselmann et al 2010, Blazy et al 2013Blazy and Stef 2015) and utilized crosscountry variation in the applicable codes and procedures (e.g., Davydenko and Franks 2008, Haselmann et al 2010, Blazy et al 2013, Blazy and Stef 2015.…”

“…Scarce previous micro-level studies on the predictors of debt recovery have examined the importance of bankruptcy laws (see, e.g., Armour et al 2008, Davydenko and Franks 2008, Haselmann et al 2010, Blazy et al 2013Blazy and Stef 2015) and utilized crosscountry variation in the applicable codes and procedures (e.g., Davydenko and Franks 2008, Haselmann et al 2010, Blazy et al 2013, Blazy and Stef 2015. We, in contrast, much like Armour et al (2008) or rely on a within-country research design, but focus on the thus far empirically unexplored role of liquidation trustees as the agents delegated the execution of insolvency procedures in the resolution of firm liquidation cases.…”