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Revisiting Hungary's Bankruptcy Episode

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  • John Bonin
  • Mark E. Schaffer

Abstract

We take a retrospective look at Hungary's experiment with a particularly draconian bankruptcy law. For an eighteen-month period in 1992-93, the Hungarian bankruptcy code contained an unusual automatic trigger that required the managers of firms that held overdue debts of any size to any creditor to initiate organisation or liquidation proceedings to avoid prosecution under the civil code. We analyse the impact of this 'legislative shock therapy' on the economy during the period and examine its effects on resource reallocation and institution building. We argue that, although a key motivation for introducing the automatic trigger was to harden the budget constraints of firms, the empirical evidence suggests that hard budget constraints were already being imposed by banks and by other firms, and the effect of the automatic trigger was rather the exacerbation of a credit crunch and disruption of economic activity. We also suggest that other features of the Hungarian bankruptcy framework not connected to the automatic trigger provide the more important lessons. In particular, it is possible to introduce a bankruptcy track in a transition economy that can both transfer control of the firm from management to creditors and maintain the firm as a going concern while restructuring takes place.

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Bibliographic Info

Paper provided by Centre for Economic Reform and Transformation, Heriot Watt University in its series CERT Discussion Papers with number 9906.

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Date of creation: 1999
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Handle: RePEc:hwe:certdp:9906

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References

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  1. Jan Svejnar, 1991. "Microeconomic Issues in the Transition to a Market Economy," Journal of Economic Perspectives, American Economic Association, vol. 5(4), pages 123-138, Fall.
  2. Janet Mitchell, 1998. "Bankruptcy Experience in Hungary and the Czech Republic," William Davidson Institute Working Papers Series 211, William Davidson Institute at the University of Michigan.
  3. Rajan, Raghuram G & Zingales, Luigi, 1995. " What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-60, December.
  4. Mitchell, Janet, 1998. "Strategic Creditor Passivity, Regulation and Bank Bailouts," CEPR Discussion Papers 1780, C.E.P.R. Discussion Papers.
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Cited by:
  1. Marica Frangakis, 1998. "Bank Reform in Greece with reference to Eastern Europe. The Case of the Hellenic Industrial Development Bank S.A," CERT Discussion Papers 9811, Centre for Economic Reform and Transformation, Heriot Watt University.
  2. Hainz, Christa, 2007. "Creditor Passivity: The Effects of Bank Competition and Institutions on the Strategic Use of Bankruptcy Filings," Discussion Papers in Economics 2028, University of Munich, Department of Economics.
  3. Nivorozhkin, Eugene, 2004. "Financing Choices of Firms in EU Accession Countries," Ratio Working Papers 33, The Ratio Institute.
  4. Robbie Mochrie, 2000. "An Appraisal of Debt Relief for Poor Countries," CERT Discussion Papers 0005, Centre for Economic Reform and Transformation, Heriot Watt University.
  5. Colombo, Emilio & Stanca, Luca, 2006. "Investment decisions and the soft budget constraint: evidence from Hungarian manufacturing firms," MPRA Paper 18708, University Library of Munich, Germany.
  6. Katsumi FUJIWARA, 2005. "The Development and Performance of the Bankruptcy System in Contemporary Russia," The Journal of Comparative Economic Studies (JCES), The Japanese Society for Comparative Economic Studies (JSCES), vol. 1, pages 59-78, July.
  7. Perotti, Enrico C. & Vesnaver, Luka, 2004. "Enterprise finance and investment in listed Hungarian firms," Journal of Comparative Economics, Elsevier, vol. 32(1), pages 73-87, March.
  8. Haselmann, Rainer & Pistor, Katharina & Vig, Vikrant, 2006. "How Law Affects Lending," MPRA Paper 157, University Library of Munich, Germany.
  9. Karel Janda, 2004. "Bankruptcy Procedures with Ex Post Moral Hazard," Working Papers IES 61, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised 2004.
  10. Alan Bevan & Saul Estrin & Mark E. Schaffer, 1999. "Determinants of Enterprise Performance during Transition," CERT Discussion Papers 9903, Centre for Economic Reform and Transformation, Heriot Watt University.
  11. Nivorozhkin, Eugene, 2004. "Financing choices of firms in EU accession countries," BOFIT Discussion Papers 6/2004, Bank of Finland, Institute for Economies in Transition.

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