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What Discount Rate Should Bankruptcy Judges Use? Estimates from Canadian Reorganization Data

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  • Fabrice Barthélémy

    (Université de Cergy-Pontoise (Théma))

  • Timothy C.G. Fisher

    (Wilfrid Laurier University and University of Sydney)

  • Jocelyn Martel

    (Université de Cergy-Pontoise (Théma) and ESSEC Business School)

Abstract

Using data from financial reorganization plans filed by insolvent Canadian firms, we estimate the discount rate implicit in the unsecured creditors' reorganization decision. Using (HARA) utility functions, we find the implicit monthly discount rate of creditors to be 4.9%, which corresponds to an annual discount rate of 77%. This is 7 to 10 times higher than discount rates used in previous empirical studies of reorganization. The discount rate estimates are robust to varying degrees of risk aversion and market to book value ratio of assets.

Suggested Citation

  • Fabrice Barthélémy & Timothy C.G. Fisher & Jocelyn Martel, 2006. "What Discount Rate Should Bankruptcy Judges Use? Estimates from Canadian Reorganization Data," THEMA Working Papers 2006-19, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    • Handle: RePEc:ema:worpap:2006-19
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    References listed on IDEAS

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    1. Fisher, Timothy C G & Martel, Jocelyn, 1999. "Should We Abolish Chapter 11? Evidence from Canada," The Journal of Legal Studies, University of Chicago Press, vol. 28(1), pages 233-257, January.
    2. 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 111-157, January.
    3. Timothy C.G. Fisher & Jocelyn Martel, 2004. "Empirical Estimates of Filtering Failure in Court‐Supervised Reorganization," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 1(1), pages 143-164, March.
    4. Henry Ruderman & Mark D. Levine & James E. McMahon, 1987. "The Behavior of the Market for Energy Efficiency in Residential Appliances Including Heating and Cooling Equipment," The Energy Journal, International Association for Energy Economics, vol. 0(Number 1), pages 101-124.
    5. Dermot Gately, 1980. "Individual Discount Rates and the Purchase and Utilization of Energy-Using Durables: Comment," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 373-374, Spring.
    6. F. Barthelemy & T. C.G. Fisher & J. Martel, 2004. "Estimates of Creditors' Discount Rates in Court-Supervised Reorganisation Decisions," THEMA Working Papers 2004-16, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    7. Saul Pleeter & John T. Warner, 2001. "The Personal Discount Rate: Evidence from Military Downsizing Programs," American Economic Review, American Economic Association, vol. 91(1), pages 33-53, March.
    8. Moore, Michael J & Viscusi, W Kip, 1990. "Models for Estimating Discount Rates for Long-term Health Risks Using Labor Market Data," Journal of Risk and Uncertainty, Springer, vol. 3(4), pages 381-401, December.
    9. Dreyfus, Mark K & Viscusi, W Kip, 1995. "Rates of Time Preference and Consumer Valuations of Automobile Safety and Fuel Efficiency," Journal of Law and Economics, University of Chicago Press, vol. 38(1), pages 79-105, April.
    10. Jerry A. Hausman, 1979. "Individual Discount Rates and the Purchase and Utilization of Energy-Using Durables," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 33-54, Spring.
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    Cited by:

    1. Cepec, Jaka & Grajzl, Peter, 2020. "Debt-to-equity conversion in bankruptcy reorganization and post-bankruptcy firm survival," International Review of Law and Economics, Elsevier, vol. 61(C).

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