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Are there alternatives to bankruptcy? a study of small business distress in Spain

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  • Miguel García-Posada

    (Banco de España-Eurosystem)

  • Juan S. Mora-Sanguinetti

    (Banco de España-Eurosystem)

Abstract

Small businesses, the majority of Spanish fi rms, rarely fi le for formal bankruptcy, and this has been the case even during the current economic crisis. This suggests that bankruptcy law has a limited role to play in the distress of small fi rms. We propose an explanation based on two premises: (i) bankruptcy procedures are more costly and drawn out than the main alternative procedure, the mortgage foreclosure; (ii) personal bankruptcy law is unattractive to the individual debtor. Empirical analyses on a large micro data sample of Spanish, French and UK fi rms corroborate our hypothesis. It is important to note that these results are based on data that do not yet capture the impact of recent reforms of the Spanish insolvency framework.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/13/Fich/dt1315e.pdf
File Function: First version, October 2013
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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 1315.

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Length: 55 pages
Date of creation: Oct 2013
Date of revision:
Handle: RePEc:bde:wpaper:1315

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Keywords: bankruptcy; mortgage; insolvency;

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References

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  1. Nicola Gennaioli & Stefano Rossi, 2012. "Contractual Resolutions of Financial Distress," Working Papers 651, Barcelona Graduate School of Economics.
  2. Miguel García-Posada & Juan S. Mora-Sanguinetti, 2012. "Why do spanish firms rarely use the bankruptcy system? The role of the mortgage institution," Banco de Espa�a Working Papers 1234, Banco de Espa�a.
  3. John Armour, 2001. "The Law and Economics of Corporate Insolvency: A Review," ESRC Centre for Business Research - Working Papers wp197, ESRC Centre for Business Research.
  4. Julian Franks & Oren Sussman, 2005. "Financial Distress and Bank Restructuring of Small to Medium Size UK Companies," Review of Finance, Springer, vol. 9(1), pages 65-96, 03.
  5. Acharya, Viral V. & Sundaram, Rangarajan K. & John, Kose, 2011. "Cross-country variations in capital structures: The role of bankruptcy codes," Journal of Financial Intermediation, Elsevier, vol. 20(1), pages 25-54, January.
  6. Régis Blazy & Bertrand Chopard & Eric Langlais & Ydriss Ziane, 2013. "Personal Bankruptcy Law, Fresh Starts, and Judicial Practice," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 169(4), pages 680-702, December.
  7. Césaire A. Meh & Yaz Terajima, 2008. "Unsecured Debt, Consumer Bankruptcy, and Small Business," Working Papers 08-5, Bank of Canada.
  8. Marco Celentani & Miguel García-Posada & Fernando Gómez, 2010. "The Spanish Business Bankruptcy Puzzle and the Crisis," Working Papers 2010-11, FEDEA.
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