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Do Reorganization Costs Matter for Efficiency? Evidence from a Bankruptcy Reform in Colombia

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  • Xavier Gin�
  • Inessa Love

Abstract

An efficient bankruptcy system should liquidate nonviable businesses and reorganize viable ones. The importance of this filtering process has long been recognized in the literature; the typical reason advanced for its failure has been biases (in codes or among judges). In this paper we show that bankruptcy costs can be another source of such filtering failure. We illustrate this with the Colombian reform of 1999. Using data from 1,924 firms filing for bankruptcy between 1996 and 2003, we find that the prereform reorganization proceedings were so inefficient that the bankruptcy system failed to separate economically viable firms from inefficient ones. In contrast, by streamlining the reorganization process, the reform contributed to the improvement of the selection of viable firms into reorganization. In this sense, the new law increased the efficiency of the bankruptcy system in Colombia.

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Bibliographic Info

Article provided by University of Chicago Press in its journal The Journal of Law and Economics.

Volume (Year): 53 (2010)
Issue (Month): 4 ()
Pages: 833 - 864

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Handle: RePEc:ucp:jlawec:doi:10.1086/605848

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  1. Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-66, September.
  2. Oliver Hart, 2000. "Different Approaches to Bankruptcy," Harvard Institute of Economic Research Working Papers 1903, Harvard - Institute of Economic Research.
  3. White, Michelle J, 1994. "Corporate Bankruptcy as a Filtering Device: Chapter 11 Reorganizations and Out-of-Court Debt Restructurings," Journal of Law, Economics and Organization, Oxford University Press, vol. 10(2), pages 268-95, October.
  4. Gertner, Robert & Scharfstein, David, 1991. " A Theory of Workouts and the Effects of Reorganization Law," Journal of Finance, American Finance Association, vol. 46(4), pages 1189-1222, September.
  5. repec:wop:humbsf:2000-72 is not listed on IDEAS
  6. Philippe Aghion & Oliver D. Hart & John Moore, 1994. "The Economics of Bankruptcy Reform," NBER Chapters, in: The Transition in Eastern Europe, Volume 2: Restructuring, pages 215-244 National Bureau of Economic Research, Inc.
  7. Per Strömberg, 2000. "Conflicts of Interest and Market Illiquidity in Bankruptcy Auctions: Theory and Tests," Journal of Finance, American Finance Association, vol. 55(6), pages 2641-2692, December.
  8. Franks, Julian R & Lóránth, Gyöngyi, 2005. "A Study of Inefficient Going Concerns in Bankruptcy," CEPR Discussion Papers 5035, C.E.P.R. Discussion Papers.
  9. Alderson, Michael J. & Betker, Brian L., 1995. "Liquidation costs and capital structure," Journal of Financial Economics, Elsevier, vol. 39(1), pages 45-69, September.
  10. Thorburn, Karin S., 2000. "Bankruptcy auctions: costs, debt recovery, and firm survival," Journal of Financial Economics, Elsevier, vol. 58(3), pages 337-368, December.
  11. Weiss, Lawrence A., 1990. "Bankruptcy resolution: Direct costs and violation of priority of claims," Journal of Financial Economics, Elsevier, vol. 27(2), pages 285-314, October.
  12. Paul R. Milgrom, 1981. "Good News and Bad News: Representation Theorems and Applications," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 380-391, Autumn.
  13. Vojislav Maksimovic & Gordon Phillips, 1998. "Asset Efficiency and Reallocation Decisions of Bankrupt Firms," Journal of Finance, American Finance Association, vol. 53(5), pages 1495-1532, October.
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Cited by:
  1. Cadot, Olivier & Fernandes, Ana & Gourdon, Julien & Mattoo, Aaditya, 2011. "Impact Evaluation of Trade Interventions: Paving the Way," CEPR Discussion Papers 8638, C.E.P.R. Discussion Papers.
  2. William Kerr & Ramana Nanda, 2007. "Democratizing Entry: Banking Deregulations, Financing Constraints, and Entrepreneurship," Working Papers 07-33, Center for Economic Studies, U.S. Census Bureau.
  3. Erkki Laitinen, 2011. "Assessing viability of Finnish reorganization and bankruptcy firms," European Journal of Law and Economics, Springer, vol. 31(2), pages 167-198, April.
  4. International Finance Corporation & World Bank, 2009. "Doing Business 2010 : Reforming through Difficult Times - Comparing Regulation in 183 Economies," World Bank Publications, The World Bank, number 2562, August.
  5. Demirgüç-Kunt, A. & Beck, T.H.L. & Honohan, P., 2008. "Finance for all?: Policies and pitfalls in expanding access," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3508393, Tilburg University.
  6. David McKenzie, 2010. "Impact Assessments in Finance and Private Sector Development: What Have We Learned and What Should We Learn?," World Bank Research Observer, World Bank Group, vol. 25(2), pages 209-233, August.

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