Financial distress, bankruptcy law and the business cycle
AbstractThis paper explores the business cycle implications of financial distress and bankruptcy law. We find that due to the presence of financial imperfections the effect of liquidations on the price of capital goods can generate endogenous fluctuations. We show that a law reform that ÃÂ¢Ã¢âÂ¬ÃÅsoftensÃÂ¢Ã¢âÂ¬Ã¢âÂ¢ bankruptcy law may increase the amplitude of the cycle in the long run. In contrast, a policy of bailing out businesses during the bust, or actively managing the interest rate across the cycle, could stabilize the economy in the long run. A comprehensive welfare analysis of the policy is provided as well.
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Bibliographic InfoArticle provided by Springer in its journal Annals of Finance.
Volume (Year): 3 (2007)
Issue (Month): 1 (January)
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Web page: http://www.springerlink.com/link.asp?id=112370
Bankruptcy law; Business cycles; Financial distress; Liquidation; E32; E44; G33;
Other versions of this item:
- Oren Sussman & Javier Suarez, 2004. "Financial Distress, Bankruptcy Law and the Business Cycle," OFRC Working Papers Series 2004fe07, Oxford Financial Research Centre.
- Oren Sussman & Javier Suarez, 2004. "Financial Distress, Bankruptcy Law and the Business Cycle," Economics Series Working Papers 2004-FE-07, University of Oxford, Department of Economics.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
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