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Why We Should Change Our Attitude Towards Distressed Firms

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  • Nicos Zafiris

Abstract

This article surveys ‘creditor†friendly’ and ‘enterprise†friendly’ bankruptcy regimes with a focus on the methodology underlying the filter test in distress, as reflected both in its academic treatment and in legal practice. I find that the test exhibits pro†liquidation bias in designating liquidation of a firm with recovery potential as the Type II error, and in underplaying the benefits of a possible turnaround. Further influences militating against continuation include the power conferred on creditors through the balance sheet criterion and the undervaluation of intangible assets. I make the case for reversing such biases to establish a presumption in favour of continuation.

Suggested Citation

  • Nicos Zafiris, 2018. "Why We Should Change Our Attitude Towards Distressed Firms," Economic Affairs, Wiley Blackwell, vol. 38(1), pages 74-87, February.
    • Handle: RePEc:bla:ecaffa:v:38:y:2018:i:1:p:74-87
    DOI: 10.1111/ecaf.12266
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    References listed on IDEAS

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    1. Sandra Gottschalk & Francis J. Greene & Bettina Müller, 2017. "The impact of habitual entrepreneurial experience on new firm closure outcomes," Small Business Economics, Springer, vol. 48(2), pages 303-321, February.
    2. Simon Deakin & Viviana Mollica & Prabirjit Sarkar, 2015. "Varieties of Creditor Protection: Insolvency Law Reform & Credit Expansion in Developed Market Economies," Working Papers wp473, Centre for Business Research, University of Cambridge.
    3. Michelle J. White, 2016. "Small Business Bankruptcy," Annual Review of Financial Economics, Annual Reviews, vol. 8(1), pages 317-336, October.
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    Cited by:

    1. Stefan Mayr & Christine Duller & Matthias Baschinger, 2023. "Assessment of formal proceedings and out-of-court reorganisation: results from a survey among turnaround professionals in Austria," European Journal of Law and Economics, Springer, vol. 56(2), pages 325-367, October.

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