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Bankruptcy laws and debt renegotiation

  • Kolecek, Ludek
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    This paper analyzes the effect of the toughness of bankruptcy law on the number of liquidations in a simple model of borrowing and lending with asymmetric information, where the creditor cannot credibly commit to liquidate the firm if the default occurs. In our setting we consider a bankruptcy law to be a one-dimensional variable that influences creditor's expectation value of collateral. We find that there is an interval of the bankruptcy law, where the number of liquidations decreases in the toughness of the bankruptcy law. We also find that if the liquidation costs are high, softer bankruptcy law is preferred.

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    Article provided by Elsevier in its journal Journal of Financial Stability.

    Volume (Year): 4 (2008)
    Issue (Month): 1 (April)
    Pages: 40-61

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    Handle: RePEc:eee:finsta:v:4:y:2008:i:1:p:40-61
    Contact details of provider: Web page: http://www.elsevier.com/locate/jfstabil

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    1. Philippe Aghion & Oliver Hart & John Moore, 1992. "The Economics of Bankruptcy Reform," NBER Working Papers 4097, National Bureau of Economic Research, Inc.
    2. Berglof, Erik & Roland, Gerard, 1997. "Soft budget constraints and credit crunches in financial transition," European Economic Review, Elsevier, vol. 41(3-5), pages 807-817, April.
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    7. Hainz, Christa, 2004. "Quality of Institutions, Credit Markets and Bankruptcy," Discussion Papers in Economics 388, University of Munich, Department of Economics.
    8. Berkovitch, Elazar & Israel, Ronen, 1999. "Optimal Bankruptcy Laws across Different Economic Systems," Review of Financial Studies, Society for Financial Studies, vol. 12(2), pages 347-77.
    9. Djankov, Simeon & McLiesh, Caralee & Shleifer, Andrei, 2007. "Private credit in 129 countries," Journal of Financial Economics, Elsevier, vol. 84(2), pages 299-329, May.
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    13. Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1997. "Legal Determinants of External Finance," NBER Working Papers 5879, National Bureau of Economic Research, Inc.
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    15. 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.
    16. Katharina Pistor & Martin Raiser & Stanislaw Gelfer, 2000. "Law and Finance in Transition Economies," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 8(2), pages 325-368, July.
    17. Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 75(4), pages 850-55, September.
    18. Katharina Pistor, 2000. "Patterns of legal change: shareholder and creditor rights in transition economies," Working Papers 49, European Bank for Reconstruction and Development, Office of the Chief Economist.
    19. Berkovitch, Elazar & Israel, Ronen & Zender, Jaime F., 1998. "The Design of Bankruptcy Law: A Case for Management Bias in Bankruptcy Reorganizations," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(04), pages 441-464, December.
    20. Katharina Pistor & Martin Raiser & Stanislav Gelfer, 2000. "Law and finance in transition economies," Working Papers 48, European Bank for Reconstruction and Development, Office of the Chief Economist.
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