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Revisiting Hungary's Bankruptcy Episode

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  • John P. 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 reorganization or liquidation proceedings to avoid prosecution under the civil code. We analyze 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 William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 255.

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Length: pages
Date of creation: 01 Sep 1999
Date of revision:
Handle: RePEc:wdi:papers:1999-255

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Keywords: Hungary; bankruptcy; soft budgeet constraints; transition economies; trade credit; bad debt;

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References

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  1. 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.
  2. 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.
  3. Raghuram G. Rajan & Luigi Zingales, 1994. "What Do We Know About Capital Structure? Some Evidence from International Data," NBER Working Papers 4875, National Bureau of Economic Research, Inc.
  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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Citations

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Cited by:
  1. Emilio Colombo & Luca Stanca, 2003. "Investment Decisions and the Soft Budget Constraint: Evidence from Hungarian Manufacturing Firms," Working Papers 68, University of Milano-Bicocca, Department of Economics, revised Dec 2003.
  2. Robbie Mochrie, 2000. "An Appraisal of Debt Relief for Poor Countries," CERT Discussion Papers 0005, Centre for Economic Reform and Transformation, Heriot Watt University.
  3. Hainz, Christa, 2009. "Creditor passivity: The effects of bank competition and institutions on the strategic use of bankruptcy filings," Journal of Comparative Economics, Elsevier, vol. 37(4), pages 582-596, December.
  4. 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.
  5. Nivorozhkin, Eugene, 2004. "Financing choices of firms in EU accession countries," BOFIT Discussion Papers 6/2004, Bank of Finland, Institute for Economies in Transition.
  6. 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.
  7. Nivorozhkin, Eugene, 2004. "Financing Choices of Firms in EU Accession Countries," Ratio Working Papers 33, The Ratio Institute.
  8. 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.
  9. Rainer Haselmann & Katharina Pistor & Vikrant Vig, 2010. "How Law Affects Lending," Review of Financial Studies, Society for Financial Studies, vol. 23(2), pages 549-580, February.
  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. 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.

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