On the Efficiency of Bankruptcy Law: Empirical Evidence in Spain

Abstract

The current economic crisis is showing one of the main problems that many companies in financial distress have to face, namely, the impact of bankruptcy law in relation to companies and firms. This paper aims to analyze the bankruptcy law ex‐ante efficiency when companies are in financial distress. To test it out, two research questions are submitted: (i) Is solvency, the criterion used in the Spanish law, the best one to assess the relative significance of the main indicators, which determine bankrupt firms? (ii) Is the Spanish bankruptcy law efficient according to solvency or are there better criteria? To answer them, a logistic regression model is conducted. The sample embraces 1,387 firms in Spain, the data being obtained from 12 Commercial Justice Courts complemented with financial information. The main conclusion is that the solvency criterion is adequate to classify bankrupt companies although currently Spanish Bankruptcy law is not as efficient as it could be. Additionally, the relevant companies' indicators, which explain the financial distress procedure, are presented. Copyright © 2013 INSOL International and John Wiley & Sons, Ltd

The efficiency of bankruptcy law: evidence of creditor protection in Poland

“…Our study contributes to the literature on bankruptcy by delivering robust empirical evidence on the efficiency of Polish bankruptcy procedures. This study complements the Camacho-Miñano et al (2013) terms of the interim efficiency assessment. We contrast the ex ante efficiency of the Spanish and Polish legal systems, at 41% and 75% respectively.…”

“…An ex post efficiency system assures that the highest total value will be obtained for the distressed firm. Camacho-Miñano et al (2013) enhance it by considering interim efficiency, that should allow a realization of the assets in the shortest time at the lowest achievable cost. Thus, in the research we follow the Camacho-Miñano et al (2013) test for ex ante efficiency.…”

“…Camacho-Miñano et al (2013) enhance it by considering interim efficiency, that should allow a realization of the assets in the shortest time at the lowest achievable cost. Thus, in the research we follow the Camacho-Miñano et al (2013) test for ex ante efficiency. We apply the time value of the creditors recovery rate as the proxy for interim efficiency, while for the ex post efficiency we use the surviving test (the ability of the company to go through the bankruptcy procedures as a going business for a period of at least 3 years after the end 5 of the court procedure).…”

“…If all insolvent firms enter into the bankruptcy procedure and solvent firms do not, it means that Polish law is perfectly ex ante efficient. We follow the two-fold Camacho- Miñano et al (2013) setting for the insolvent firm identification. Thus, if the firm's current assets to current liabilities (CA/CL) ratio > 2, it is considered solvent in the short term (SOL); if the firm's total assets to total liabilities (TA/TL) ratio > 1.5, the firm is considered solvent in the long term (GUA).…”

“…For efficiency evaluation and comparability between Poland and Spain we follow the rule applied by Camacho-Miñano et al (2013). In the case where the sum of Type 1 and 2 errors is less than 3%, the legal setting is to be considered efficient, otherwise, inefficient.…”