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Bankruptcy and Insolvency: An Exploration of Relevant Theories

Author

Listed:
  • Adegbemi Babatunde Onakoya

    (Department of Economics, Banking and Finance, Babcock University, Ilishan - Remo, Nigeria,)

  • Ayooluwa Eunice Olotu

    (Department of Accounting, Babcock University, Ilishan - Remo, Nigeria)

Abstract

The essence of the law on bankruptcy is to collect the debt of an entity and distribute such asset among the contending claimholders. It is, also meant to resolve the broad issues of business failure in the context of the imminent or indeed the actual collapse of the indebted entity. The objective of the study is to explore relevant theories guiding the procedure of distribution or entitlement in bankruptcy among a group of agents. The study employed exploratory research method via an extended literature review, to investigate the underlying principles guiding the allocation of a given amount of a perfectly divisible good among a group of agents. The results of this extended literature review indicate that the procedure of distribution or entitlement in bankruptcy is supported by five of the theories reviewed while only value based theory posits the absence of any cogent solution to the financial distress of the debtor. The knowledge of theories is not enough for business survival, the ability to predict the possible occurrence of business failures is necessary. Market based models including the stock market option valuation approach perform better than the earlier models which rely heavily on historical accounting figures.

Suggested Citation

  • Adegbemi Babatunde Onakoya & Ayooluwa Eunice Olotu, 2017. "Bankruptcy and Insolvency: An Exploration of Relevant Theories," International Journal of Economics and Financial Issues, International Journal of Economics and Financial Issues, vol. 7(3), pages 706-712.
    • Handle: RePEc:eco:journ1:2017-03-90
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    References listed on IDEAS

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    Cited by:

    1. Alexey Litvinenko, 2023. "A Comparative Analysis of Altman's Z-Score and T. Jury's Cash-Based Credit Risk Models with The Application to The Production Company and The Data for The Years 2016-2022," Accounting and Management Information Systems, Faculty of Accounting and Management Information Systems, The Bucharest University of Economic Studies, vol. 22(3), pages 518-553, September.
    2. Anisoara Niculina Apetri & Ancuta-Anisia Chelba, 2025. "Impacts of Macroeconomic Factors on Insolvency: Case of Romanian Companies," Economics and Applied Informatics, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, issue 2, pages 22-26.
    3. Anisoara Niculina Apetri & Ancuta-Anisia Chelba, 2025. "Impacts of Macroeconomic Factors on Insolvency: Case of Romanian Companies," Ovidius University Annals, Economic Sciences Series, Ovidius University of Constantza, Faculty of Economic Sciences, vol. 0(1), pages 495-500, August.

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    Keywords

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    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K11 - Law and Economics - - Basic Areas of Law - - - Property Law
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law

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