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Should We Abolish Chapter 11? Evidence from Canada

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  • Fisher, Timothy C G
  • Martel, Jocelyn

Abstract

Chapter 11 has been severely criticized over the last decade. Some American jurists arguing in favor of revising Chapter 11 have raised the possibility that the Canadian reorganization system might be a good alternative. This article examines data on firms undergoing reorganization under the Canadian bankruptcy system and argues that there are fruitful lessons to be learned from the Canadian experience with court-supervised reorganization. Canadian reorganization plans have very high rates of acceptance, confirmation, and consummation. Firms in Canada are almost eight times more likely to survive reorganization than are firms in Chapter 11. Further, small firms are just as likely as large firms are to emerge from reorganization in Canada, contrary to experience in the United States. The data also show that Canadian reorganization procedure offers a very rapid solution to financial distress and that creditors gain, in expected value terms, from reorganization over liquidation. We use our analysis of the relative performance of the two systems to suggest some avenues for reform of Chapter 11. Copyright 1999 by the University of Chicago.

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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Legal Studies.

Volume (Year): 28 (1999)
Issue (Month): 1 (January)
Pages: 233-57

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Handle: RePEc:ucp:jlstud:v:28:y:1999:i:1:p:233-57

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References

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  1. Aghion, P. & Hart, O. & Moore, J., 1992. "The Economics of Bankruptcy Reform," Working papers 92-11, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. 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.
  3. Jocelyn Martel, 1994. "More on the Impact of Bankruptcy Reform in Canada," CIRANO Working Papers 94s-17, CIRANO.
  4. Jocelyn Martel, 1995. "Signaling in Financial Reorganization: Theory and Evidence from Canada," CIRANO Working Papers 95s-34, CIRANO.
  5. Jocelyn Martel, 1994. "Commercial Bankruptcy and Financial Reorganization in Canada," CIRANO Papers 94c-02, CIRANO.
  6. Timothy C. G. Fisher & Jocelyn Martel, 1994. "Will the Bankruptcy Reform Work? An Empirical Analysis of Financial Reorganization in Canada," Canadian Public Policy, University of Toronto Press, vol. 20(3), pages 265-277, September.
  7. Jocelyn Martel, 1996. "Solutions au stress financier : Un survol de la littérature," CIRANO Working Papers 96s-03, CIRANO.
  8. White, Michelle J, 1989. "The Corporate Bankruptcy Decision," Journal of Economic Perspectives, American Economic Association, vol. 3(2), pages 129-51, Spring.
  9. Franks, Julian R. & Torous, Walter N., 1994. "A comparison of financial recontracting in distressed exchanges and chapter 11 reorganizations," Journal of Financial Economics, Elsevier, vol. 35(3), pages 349-370, June.
  10. Eberhart, Allan C & Moore, William T & Roenfeldt, Rodney L, 1990. " Security Pricing and Deviations from the Absolute Priority Rule in Bankruptcy Proceedings," Journal of Finance, American Finance Association, vol. 45(5), pages 1457-69, December.
  11. Warner, Jerold B, 1977. "Bankruptcy Costs: Some Evidence," Journal of Finance, American Finance Association, vol. 32(2), pages 337-47, May.
  12. Eisenberg, Theodore & Tagashira, Shoichi, 1994. "Should We Abolish Chapter 11? The Evidence from Japan," The Journal of Legal Studies, University of Chicago Press, vol. 23(1), pages 111-57, January.
  13. Daigle, Katherine H & Maloney, Michael T, 1994. "Residual Claims in Bankruptcy: An Agency Theory Explanation," Journal of Law and Economics, University of Chicago Press, vol. 37(1), pages 157-92, April.
  14. 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.
  15. White, Michelle J, 1983. " Bankruptcy Costs and the New Bankruptcy Code," Journal of Finance, American Finance Association, vol. 38(2), pages 477-88, May.
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Cited by:
  1. Barthlmy, Fabrice & Fisher, Timothy C.G. & Martel, Jocelyn, 2009. "What discount rate should bankruptcy judges use? Estimates from Canadian reorganization data," International Review of Law and Economics, Elsevier, vol. 29(1), pages 67-72, March.
  2. Christine Pochet, 2002. "Institutional Complementarities within Corporate Governance Systems: A Comparative Study of Bankruptcy Rules," Journal of Management and Governance, Springer, vol. 6(4), pages 343-381, December.
  3. Leyman, Bart & Schoors, Koen J.L. & Coussement, Peter, 2011. "Does court-supervised reorganization work? Evidence from post-confirmation firm failure," International Review of Law and Economics, Elsevier, vol. 31(3), pages 149-168, September.
  4. Van Long, N. & Soubeyran, A., 1996. "R&D Spillovers and Location Choice Under Cournot Rivalry," G.R.E.Q.A.M. 96a35, Universite Aix-Marseille III.
  5. Lars-Hendrick Röller & Bernard Sinclair-Desgagné, 1996. "Asymmetry in Cournot Duopoly," CIRANO Working Papers 96s-23, CIRANO.
  6. Alexander Radygin & Revold Entov & Irina Mezheraups & Alina Gontmakher & Yuri Simachev & Natalia Shmeleva & Mikhail Kuzyk & Harry Swain, 2005. "The Institution of Bankruptcy: Development, Problems, Areas of Reforming," Published Papers 123, Gaidar Institute for Economic Policy, revised 2012.
  7. Lars Vilhuber, 1996. "Wage Flexibility and Contract Structure in Germany," CIRANO Working Papers 96s-28, CIRANO.
  8. Ondøej Knot & Ondøej Vychodil, 2006. "Czech Bankruptcy Procedures: Ex-post Efficiency View," Working Papers IES 2006/03, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jan 2006.
  9. Clas Bergström & Theodore Eisenberg & Stefan Sundgren, 2004. "On the Design of Efficient Priority Rules for Secured Creditors: Empirical Evidence from A Change in Law," European Journal of Law and Economics, Springer, vol. 18(3), pages 273-297, December.
  10. B. Leyman & K. Schoors & P. Coussement, 2008. "The Role of Firm Viability, Creditor Behavior and Judicial Discretion in the Failure of Distressed Firms under Courtsupervised Restructuring: Evidence from Belgium," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 08/509, Ghent University, Faculty of Economics and Business Administration.
  11. Bart Leyman, 2012. "The uneasy case for rehabilitating small firms under the 1997-reorganization law in Belgium: evidence from reorganization plans," European Journal of Law and Economics, Springer, vol. 34(3), pages 533-560, December.

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