Bankruptcy around the World: Explanations of its Relative Use
AbstractThe recent literature on law and finance has drawn attention to the importance of creditor rights in influencing the development of financial systems and in affecting firm corporate governance and financing patterns. Recent financial crises have also highlighted the importance of insolvency systems - a key element of creditor rights - to prevent and resolve corporate sector financial distress. The literature and crises have highlighted the role that creditor rights play in not only affecting the efficiency of ex-post resolution of distressed corporations, but also in influencing ex-ante risk-taking incentives and an economy's degree of entrepreneurship more generally. Yet, little is known on how much formal insolvency systems are actually being used, how the use of the courts to resolve financial distress relates to creditor rights, and whether any specific creditor rights matter more. This paper starts with documenting how often bankruptcy is used in a panel of 35 countries. It next investigates the relation between specific design features of insolvency regimes and the use of bankruptcy, considering also the quality of countries’ judicial systems. We find, controlling for overall development and macroeconomic shocks, that bankruptcies are higher in common-law countries and in market-oriented financial systems. Stronger creditor rights are generally associated with more use of bankruptcy, except for the presence of a "stay on assets" that is associated with fewer use of bankruptcy. Greater judicial efficiency is associated with more use of bankruptcy, but there is some substitution between stronger creditor rights and greater judicial efficiency. These findings suggest that the relationship between specific creditor rights features and the use of bankruptcy systems is more complex than perhaps thought. It may also help clarify the relationships between creditor rights, the development of financial systems, corporate ownership, and financing patterns.
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Bibliographic InfoPaper provided by Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University in its series CEI Working Paper Series with number 2002-17.
Length: 31, , 4 p.
Date of creation: Dec 2002
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Note: This Version: November 6, 2002
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Other versions of this item:
- Stijn Claessens & Leora F. Klapper, 2005. "Bankruptcy around the World: Explanations of Its Relative Use," American Law and Economics Review, Oxford University Press, vol. 7(1), pages 253-283.
- Claessens, Stijn & Klapper, Leora F., 2002. "Bankruptcy around the world - explanations of its relative use," Policy Research Working Paper Series 2865, The World Bank.
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