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What discount rate should bankruptcy judges use? Estimates from Canadian reorganization data

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  • Barthlmy, Fabrice
  • Fisher, Timothy C.G.
  • Martel, Jocelyn

Abstract

Using data from financial reorganization plans filed by insolvent Canadian firms, we estimate the discount rate implicit in the unsecured creditors' reorganization decision. Using (HARA) utility functions, we find the implicit monthly discount rate of creditors to be 4.9%, which corresponds to an annual discount rate of 77%. This is 7-10 times higher than discount rates used in previous empirical studies of reorganization. The discount rate estimates are robust to a range of assumptions about the degree of risk aversion and the market-to-book-value ratio of assets.

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  • Barthlmy, Fabrice & Fisher, Timothy C.G. & Martel, Jocelyn, 2009. "What discount rate should bankruptcy judges use? Estimates from Canadian reorganization data," International Review of Law and Economics, Elsevier, vol. 29(1), pages 67-72, March.
    • Handle: RePEc:eee:irlaec:v:29:y:2009:i:1:p:67-72
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    Cited by:

    1. Cepec, Jaka & Grajzl, Peter, 2020. "Debt-to-equity conversion in bankruptcy reorganization and post-bankruptcy firm survival," International Review of Law and Economics, Elsevier, vol. 61(C).

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