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Building legal indexes to explain recovery rates: An analysis of the French and English bankruptcy codes

Listed author(s):
  • Blazy, Régis
  • Chopard, Bertrand
  • Nigam, Nirjhar

The paper analyzes the characteristics of bankruptcy procedures that may impact on creditors’ recoveries. We propose 132 legal indexes accounting for the main functions of bankruptcy codes: namely, the accessibility of the procedures, their ability to disclose information, the protection of debtor’s assets, the coordination of the claimants and their decision power, and the sanction of management. The French procedures are more protective of the debtor’s assets and prioritize the coordination of claims. In England, liquidation procedures protect more secured claims, while unsecured creditors have more decision power under reorganization procedures. Our indexes are then used to explain recovery rates on a set of 833 bankrupt SMEs. Several bankruptcy rules are associated with higher recoveries: namely, accessibility of the procedure, protection of the debtor’s assets, protection of claims, and sanction of faulty management. On the contrary, information disclosure has negative impact on recoveries, probably due to the breach in confidentiality.

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File URL: http://www.sciencedirect.com/science/article/pii/S0378426612003354
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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 37 (2013)
Issue (Month): 6 ()
Pages: 1936-1959

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Handle: RePEc:eee:jbfina:v:37:y:2013:i:6:p:1936-1959
DOI: 10.1016/j.jbankfin.2012.10.024
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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  1. Philippe Aghion & Oliver D. Hart & John Moore, 1994. "The Economics of Bankruptcy Reform," NBER Chapters,in: The Transition in Eastern Europe, Volume 2: Restructuring, pages 215-244 National Bureau of Economic Research, Inc.
  2. repec:hrv:faseco:30728041 is not listed on IDEAS
  3. Bergstrom, Clas & Eisenberg, Theodore & Sundgren, Stefan, 2002. "Secured debt and the likelihood of reorganization," International Review of Law and Economics, Elsevier, vol. 21(4), pages 359-372, May.
  4. Blazy, Regis & Chopard, Bertrand, 2004. "Ex post efficiency of bankruptcy procedures: A general normative framework," International Review of Law and Economics, Elsevier, vol. 24(4), pages 447-471, December.
  5. La Porta, Rafael & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1997. " Legal Determinants of External Finance," Journal of Finance, American Finance Association, vol. 52(3), pages 1131-1150, July.
  6. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
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  8. Stanley D. Longhofer, 2004. "Protection for Whom? Creditor Conflict and Bankruptcy," American Law and Economics Review, Oxford University Press, vol. 6(2), pages 249-284.
  9. Gertner, Robert & Scharfstein, David, 1991. " A Theory of Workouts and the Effects of Reorganization Law," Journal of Finance, American Finance Association, vol. 46(4), pages 1189-1222, September.
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  11. Blazy, Régis & Chopard, Bertrand & Fimayer, Agnès & Guigou, Jean-Daniel, 2011. "Employment preservation vs. creditors' repayment under bankruptcy law: The French dilemma?," International Review of Law and Economics, Elsevier, vol. 31(2), pages 126-141, June.
  12. Armour John & Hsu Audrey & Walters Adrian, 2008. "Corporate Insolvency in the United Kingdom: The Impact of the Enterprise Act 2002," European Company and Financial Law Review, De Gruyter, vol. 5(2), pages 148-171, January.
  13. Edward R. Morrison, 2007. "Bankruptcy Decision Making: An Empirical Study of Continuation Bias in Small-Business Bankruptcies," Journal of Law and Economics, University of Chicago Press, vol. 50, pages 381-419.
  14. Povel, Paul, 1999. "Optimal "Soft" or "Tough" Bankruptcy Procedures," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(3), pages 659-684, October.
  15. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
  16. Sergei A. Davydenko & Julian R. Franks, 2008. "Do Bankruptcy Codes Matter? A Study of Defaults in France, Germany, and the U.K," Journal of Finance, American Finance Association, vol. 63(2), pages 565-608, April.
  17. Oliver Hart, 2006. "Different approaches to bankruptcy," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 4(1), pages 3-8, 04.
  18. Douglas Gale & Martin Hellwig, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Oxford University Press, vol. 52(4), pages 647-663.
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